Crimea Vote Props Up Eastern Europe ETFs

Overseas financial markets opened strongly on Monday morning as news of the weekend referendum in Crimea to formally join Russia was passed with an overwhelming majority vote.

The Crimean peninsula is seen as a key strategic asset for Russia in both their military and economic endeavors which is why the vote was an important turning point for tensions in the region.

The widely followed Russia Market Vectors ETF (NYSE:RSX) gained for its second consecutive day after weeks of hard pressured selling sent their markets plummeting lower. RSX tracks 48 underlying stocks traded on Russian markets, with the state-owned Gazprom OAO its predominant holding at 8.04 percent. In fact, because RSX is market cap weighted, the top 10 largest holdings represent more than 60 percent of its total portfolio. So far this year, RSX has lost 24.45 percent of its value through Fridays closing price.

Another ETF that that saw strong gains on Monday is theiShares MSCI Emerging Markets Eastern Europe ETF (NYSE:ESR) which tracks 51 underlying stocks primarily centered in Russia and Poland. This ETF takes a similar market-cap approach to its portfolio construction, but is diversified across multiple Eastern European countries. It also has a higher concentration in the energy and banking sectors than RSX.

Only time will tell if this small recovery can morph into a more sustainable uptrend. The entire Eastern European region is fighting the headwinds of social unrest and looming western sanctions as a result of this recent Crimea vote. The dispute between Russia and Ukraine is far from over and may have ripple effects across even more emerging market countries in the near future as well.

Russia typically makes up between five to fifteen percent of most emerging market and BRIC indexes which can have a significant impact on the returns of even a diversified fund such as the Vanguard Emerging Market ETF (NYSE:VWO). Investors that are looking to gain exposure to Eastern Europe or emerging markets as a value play may want to look to a diversified index to minimize the risk of overexposure to any one country or sector.