Poland ETFs Crumble on Dramatic Pension Plan Shift - ETF News And Commentary
06 September 2013 - 4:03PM
Zacks
Woes have been pretty widespread in emerging markets lately, as
countries from Indonesia to Turkey have seen their share prices
tumble. These concerns have largely centered on currencies, debt
levels, and current account deficits though, leaving some nations
relatively unscathed in the process.
One such nation that has held up reasonably well as of late is
Poland. The country’s markets have seen solid performances, though
volatility has picked up in recent trading. And now, thanks to a
recent change to the country’s pension program, Poland could be
facing some trouble of its own.
Poland in Focus
The country has recently moved to ‘reform’ its pension program,
focusing in on government bonds held by private pension funds. The
Polish government will now take over and then cancel government
bonds held by these privately managed funds, though they will not
seize stocks while future contributions look to be voluntary (see
Poland ETF Investing 101).
In addition, Polish pension funds will be banned from buying
government debt, a segment that was a huge funding source of
sovereign debt in the nation. In fact, according to Finance
Ministry data via Bloomberg, 21% of the outstanding total of Polish
government bonds were owned by the pension funds, close to 121
billion zloty or roughly $37 billion.
The state will then take these bonds and turn them into pension
liabilities in the state-run social security system. So it can be
helpful to think of this move as an accounting trick, or at least
one that helps the Polish government obtain more control over its
financial position by shifting liabilities to the social security
system—where rates of return and payouts can easily be
altered—instead of the government bond market—where changes are
viewed extremely negatively by investors.
Market Impact
Still, the move shook confidence in the Warsaw Stock Exchange,
while some believe that the liquidity will be compromised, or that
investors may want to sell out now that the program is voluntary.
Stocks in the benchmark index closed lower by several percentage
points, while yields on Polish debt also rose, despite the overall
reduction in the country’s debt-to-GDP ratio (see all the European
Equity ETFs here).
The change also put into focus the two Poland ETFs that currently
trade in the U.S., as these also declined on the day. Below, we
highlight some of key details regarding these products and how they
held up with this pension liability move:
iShares MSCI Poland Capped ETF (EPOL)
EPOL is easily the most popular Poland ETF on the market, as it has
over $270 million in AUM, and an average daily volume of 230,000
shares. The product tracks the MSCI Poland IMI 25/50 Index,
charging 62 basis points a year from investors.
This produces a fund that holds 42 stocks in its basket, with a
heavy concentration on financials (the top three are all financials
and account for roughly 32% of the total assets on their own).
Financials actually make up roughly half the portfolio, leaving 13%
for both energy and materials, and then 9% for utilities.
Volume skyrocketed for the session, as more than 2.3 million shares
moved hands, while shares of EPOL tumbled by roughly 4.5%. This
helped to push the fund to more underperformance, as the ETF is now
down about 8.3% over the past month (see instead 4 Outperforming
ETFs Leading Europe Higher).
Market Vectors Poland ETF (PLND)
The original Poland ETF, this product made its debut in November of
2009. The fund tracks the Market Vectors Poland Index, charging
investors 61 basis points a year in fees for exposure.
The product holds 30 stocks in its basket, putting heavy weights
into financials, as three of these take the top three spots in the
fund. Furthermore, financials account for 40% of the total assets
in the ETF, followed by a 15% allocation to energy, a 12% holding
in utilities, and then 10% in materials.
PLND saw volume that was roughly two times a normal session, while
the ETF lost about 4.6% of its value on the day. This moves the one
month loss for PLND down to 8.3%, once again underperforming other
broad benchmarks.
Bottom Line
Poland had been doing relatively well when compared to other big
emerging markets, as many have fallen by the wayside thanks to
internal pressures. However, the pain could now be coming for
Poland thanks to a shift in the pension program in the country
(read European ETFs: A Surge in Popularity?).
While the move is somewhat of an accounting trick, it could reduce
domestic investment in the nation, even if it improves Poland’s
headline debt-to-GDP ratio. So make sure to keep a close eye on
Poland ETFs in the weeks ahead to see how they react to the fallout
from the new change in this key segment of the country’s investing
landscape.
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