EPOL ETF: Poland Stocks Poised For More Gains

Looking for relative strength into year-end? Check out Poland. Ranked 1 out of 400 in its Asset Class, the iShares MSCI Poland ETF (NYSEARCA:EPOL) has outperformed the S&P 500 over several timeframes lately, after undergoing severe underperformance for years since its 2010 inception.

I have a buy rating on the fund. Its valuation is compelling, and I like how strong the country ETF has been in the last month and since October 2022, though it is exposed to one risky sector.

EPOL: +61% Total Return YoY, Sharply Positive This Month

According to the issuer, EPOL seeks to track the investment results of a broad-based index composed of Polish equities. The ETF offers exposure to a broad range of companies in Poland and can be used to express a bullish country view.

EPOL is a small ETF with just $209 million in assets under management as of October 27, 2023. Seeking Alpha does not show a dividend yield, but iShares notes that its trailing 12-month distribution rate is 1.6% – about on par with the S&P 500’s yield. EPOL is not an overly cheap fund given its 0.58% annual expense ratio, but share-price momentum has been impressive over recent timeframes – particularly just this month with its 13% MTD advance compared to a material decline in the SPX.

An important factor to consider with this country ETF is the currency impact. The EURUSD pair has been somewhat steady lately near $1.06 – in general, any drop in the euro is bearish, so the dollar’s rise since July makes EPOL’s alpha all the more impressive. In terms of liquidity, volume is modest at just 206,000 daily in the last three months while its 30-day median bid/ask spread is usually narrow, averaging six basis points.

Digging into the portfolio, its 37 holdings are heavily weighted into the Financials sector. So, monitoring macro interest rate trends and micro balance sheet changes are keys for prospective investors. You will not find much technology exposure in EPOL, so don’t expect the fund to track closely with the S&P 500. Overall, 68% of the allocation is found in the top 10 holdings, adding to potential risk. The top 3 positions comprise more than one-third of the ETF.

EPOL: Sector Breakdown & Top Holdings

Overall, there’s heavy mid-cap exposure and zero weight in large-cap growth. Thus, I would consider it a highly cyclical allocation given the value bent and 87% weight in SMIDs. While it is considered a low-volatility fund on the factor view, there have historically been fast moves lower in EPOL and liquidity can be weak at times despite the currently decent Seeking Alpha grade.

With a price-to-earnings ratio under 8 and a high historic yield, there is a case for a value play here. Moreover, the bank-heavy portfolio sells at less than 0.9 times book value. I like those valuation conditions.

EPOL: Portfolio & Factor Profiles

Seasonally, EPOL tends to struggle in November, according to data from Equity Clock. Still, buying around Thanksgiving (for US investors) and holding through Valentine’s Day has historically been a winning play. Long-term returns are lackluster with this country fund, however.

EPOL: Bullish Trends December-January

The Technical Take

As mentioned earlier, Poland equities have been a long-term loser in the ETF’s more than 12-year history. Notice in the price-only chart below that the fund is under its highs from many years ago. Just recently, EPOL failed to rally above its late 2021 peak near $24. The $21 mark was met with selling pressure before a test of the mid-$20s could be made. Shares plunged by more than 20% from late July to a low earlier this month.

Interestingly, there has been sharp relative strength in the last handful of weeks, so that bears watching heading into year-end. For now, the shorter-term 50-day moving average remains above the long-term 200-day moving average, which is a positive sign. With a high amount of volume by price up to the $24 level, however, the bulls have their work cut out for them.

Also take a look at how EPOL broke below a key uptrend support line off the October 2022 low – that tells me bearish absolute risks remain in play despite relative outperformance since earlier this month. I see near-term support at the recent inflection spot of $16.50. Overall, there is not a whole lot to be super excited about technically.

EPOL: Big Relative Strength, Lackluster Absolute Strength

The Bottom Line

I have a buy rating on EPOL. The country ETF features a very low valuation with strong share-price momentum. Currency risks and the Polish banking sector are key risks to monitor.