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Time to Invest in Poland ETFs?

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Poland is one of the few countries in Europe that has shown an ability to weather the economic crisis in the Euro-zone. The country’s solid economic performance despite the weakness in many of its neighbors can be attributed to the internal strength of the economy, and its minimal exposure to distressed southern European states (Poland ETF Investing 101).

However, the economy, which survived the four years of economic crisis, is beginning to show new signs of weakness.

Trouble for Poland?

Reduced government spending along with waning consumer confidence resulted in slower growth of the economy in 2012. The government, in an attempt to scale down the deficit level to EU's requirement of below 3% of GDP, has made significant cuts in spending.

Further, lower export demand attributable to the deepening crisis in the Euro-zone also dampened the growth of the economy to some extent. Slashed public investment along with stagnation in the housing market is leading to a deep recession in the construction sector.

For 2013, the European Commission appears to be a bit cynical on the outlook of the Polish economy. It anticipates the economy to grow at the rate of 1.2% in 2013 and 2.2% in 2014 (Three Resilient European ETFs Still Going Strong).

The projected growth rate has been slashed from the prior forecast of 1.8% for 2013 and 2.6% for 2014. This is the slowest growth rate expected for the economy in a span of 12 years, though it is worth noting it is still high compared to many euro zone counterparts.

It appears that growth in domestic demand will be undermined by a weak economic outlook for the main trading partners of the country. This is expected to affect Polish exports in 2013.

Rising unemployment levels are also a laggard on domestic demand. The unemployment rate last month climbed to a six-year high of 14.2%. For 2013, the unemployment rate is expected to be at 10.3%. It is believed that the economy will see some recovery in domestic demand only in the latter part of the year.

The Bright Side of Poland

Still, Poland remains a robust option when compared to many of its peers in the region. Additionally, its projected growth rate is far in excess of what many other economies are seeing in the area, suggesting that Poland could still be a great option.

This could be especially true if domestic demand continues at a decent pace. If this is able to offset the negatives from the lowered exports and some of the fiscal issues, Poland could come out relatively unscathed (Poland: A Better Eastern Europe ETF?).

Further evidence of the improving economic outlook going forward is the country’s reduction in budget deficit and stabilizing government debt. The upgrade of the debt rating outlook by Fitch from stable to positive bears testimony to the same.

Also, recently Polish prime minister, Donald Tusk, mentioned that he is open to a referendum that would allow for a change in the country's Constitution, which could pave the way to joining the common currency regime.

Slower growth notwithstanding, Poland still appears to be a preferred location for investors in Central-Eastern Europe. The economic strength foreseen in the second half of 2013 could thus boost equities in the nation and make Poland a solid play.

And if Poland moves further towards adopting the euro, then it will positively impact the ETFs tracking the region, even with some of the currency woes, as it would suggest greater stability for the country. So, for investors willing to take a chance on Poland and its economy rebounding, we have briefly highlighted below two of the ETFs that track the country and could make for interesting options:

iShares MSCI Poland Investable Market Index Fund (EPOL)

Investors seeking a broad exposure to the Polish equity market might find EPOL an interesting pick (Poland ETFs Head-To-Head). The product focuses largely on the large cap segment of the Polish market and holds 44 securities in its basket.

The majority of its holdings are classified as blend stocks from a style perspective, while it is heavily concentrated in its top 10 holdings as these account for nearly 63.2% of the total assets. The top three companies combine to make up nearly 21.3% share of the portfolio.

From a sector perspective, the product has a definite tilt towards the financial sector making up 44.5% of the ETF. Materials and energy sectors also get double-digit allocations in the fund.

With an AUM of $149.5 million, the product charges 60 bps in fees per year from investors. The ETF has generated a negative year-to-date return of 15.90%, indicating that the economy had a slow start to the year.

Market Vectors Poland ETF (PLND)

This fund holds 30 securities in its basket, with a heavy focus on the top 10 holdings that account for about 59.21% of the assets. The top three companies take up more than 20% of the holdings.

In terms of sectors, financials consists of more than one-third of the holdings followed by double-digit weightings to energy (15.4%), materials (13.8%) and utilities (11.4%). The ETF has total assets of $27.7 million, charging investors a fee of 60 basis points annually.

PLND’s year-to-date loss stands at 12.5%, so it has managed to outperform its counterpart by a bit to start the year (Best and Worst ETFs to Start the Year).

Bottom Line

Yes, Poland is a risky investment, but the country is much better positioned than its peers in the region. The nation isn’t too heavily exposed to regionalbanking issues, while unlike its eastern counterpart Russia, it isn’t focused entirely on commodities either.

While it has been down so far in 2013, this could make the country a compelling value case, especially when compared to its peers in the region. PE ratios on both ETFs are below 14 while yields are approaching 4.75%, suggesting that even if there isn’t a turnaround in the short term, EPOL and PLND still present compelling stories for longer time periods.

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