European markets were rattled last week after news of Portuguese Banco Espirito Santo missing some payments re-ignited worries over the currency bloc's financially-fragile state. Like all sell-offs, this particular pullback in overseas markets is an opportunity in disguise while stocks on Wall Street continue to flirt with all-time highs.
Investment Case: iShares MSCI Poland Capped ETF (EPOL)
The recent weakness in overseas markets has brought the spotlight onto the Poland ETF (EPOL) for three reasons. First and foremost, EPOL is well-positioned from a longer-term fundamental perspective given the rate cut announcement made by the European Central Bank in early June of this year. This sort of accommodative monetary policy should resonate well for countries in the region as lending activity picks up and fuels economic growth; furthermore, the ECB has left the door open for more stimulus announcements, which should serve as yet another tailwind for this single-country ETF.
Second, EPOL is relatively undervalued; this ETF boasts a P/E of 17.76, which is well below that of the MSCI EMU ETF (EZU), representative of the broad eurozone, which bears a P/E of 22.09. While this difference in valuations is by no means astronomical, it does add to the bullish case for EPOL, seeing as how investors eager to add exposure to Europe (in light of the low rates overseas) might be more inclined to opt for a "cheaper" country like Poland.
Lastly, from a technical perspective, EPOL currently presents an attractive entry point, below $30 a share, for long-term investors. This ETF has managed to rise within an upward-sloping trading channel since bottoming out in mid-2012. With shares currently trading near the bottom half of their longer-term channel, investors can favorably position themselves in anticipation of the uptrend resuming course while still keeping a close watch on downside risk.
Under the Hood: EPOL
EPOL was launched at the end of May 2010 and since then the fund has amassed upwards of $340 million in assets under management:
- Expense Ratio: 0.61%
- # of Holdings: 45
- Allocation to Top 10 Holdings: 63%
This ETF is very liquid as well as shortable, making it a viable trading instrument. For investors, however, EPOL is a less-than-ideal vehicle; the fund is by no means inexpensive and its shallow, top-heavy portfolio makes it more susceptible to stock-specific declines. From a sector breakdown perspective, EPOL is heavily tilted towards financial services with basic materials and utilities accounting for the next two biggest chunks of exposure.
The Bottom Line
The recent pullback in the Poland ETF (EPOL) presents itself as an attractive buying opportunity for those looking to add exposure to European markets as the central bank overseas has expressed its commitment to maintaining an accommodative monetary policy. This ETF appears favorably positioned to take advantage of improving growth in the region, and from a technical perspective, EPOL appears ripe for a rebound. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
Disclosure: No positions at time of writing.
