Emerging market equities have been a laggard since the start
of the year, underperforming domestic equities by a wide margin.
Lower demand, Eurozone weakness and an appreciating dollar have
been the key culprits in the slowdown in these developing
The weakness in the emerging market is quite evident in the
performance of broad-based products like
Vanguard FTSE Emerging Markets ETF (
iShares MSCI Emerging Markets ETF (
Time to Buy Emerging Market ETFs?
Both VWO and EEM have slumped in the period, tumbling close to
3.86% and 4.62%, respectively, in the time frame. Yet these
losses pale in comparison to what some experienced in certain
emerging nations, especially in the case of Russia.
Russia in Focus
The Russian markets have pretty much matched their broad-based
funds in terms of movements, only with significantly more
volatility. Investors should note that Russian stocks have a big
chunk of their value so far this year.
Russia is the world's top producer of crude oil and has the
most natural gas of any country on the planet, ensuring that it
will be a top player in this space for decades to come. However,
investors should note that the oil sector has been
In fact, the state run, largest natural gas extractor Gazprom,
which is responsible for half of the Russian government's
revenue, has not been really successful in reducing the
government's deficit or improving the state's pension system (
Will There Be a WTO Boost for Russia ETFs?
Also, consumer demand appears to be sliding, attributable to
the weakness in the euro zone, which accounts for about half
of Russian trade, thereby obstructing corporate investment and
reducing demand for commodities.
However, Russia's industry showed a sharp improvement in
March, recording a rise in output for the first time after
December. Industrial production recorded growth of 2.6% year over
The growth was mainly driven by a much weaker base effect and
strengthening output in all major sectors, with the fastest
year-over-year growth in manufacturing. However, the outlook for
industrial production appears to be somewhat uncertain.
The economy ministry has reduced its 2013 economic growth
forecast to 2.4% from 3.6% issued earlier in April. Additionally,
core inflation remains a matter of concern for the economy.
However, a low unemployment level along with high capacity
utilization should provide a cushion in this uncertain
Also, the ministry mentioned that the Russian economy would
grow only 3.7% in 2014, down from an earlier outlook of 4.3%, and
4.1% in 2015 from 4.5% projected earlier. The economy expects
weak exports, capital inflows, investment, industrial production
and retail growth (
Why Russia ETFs Are Not a Debt Crisis Safe
The ministry has also revised its investment growth forecast
downwards to 6.6% from 7.3% in 2014 and to 7.2% from 7.9% in
2015, while industrial growth is expected to be 3.4% in both
years, which is also a downward revision from an earlier forecast
of 3.7% for both years.
The ministry does not foresee capital inflow in the economy in
2014, and expects just $10 billion in inflow in 2015, which is
also a huge downward revision from an earlier estimated figure of
$40 billion, in 2015.
Given the unsteady Russian economy, it could be a dicey time
to invest in Russian
. Though, for investors seeking to learn more about the space,
and some of the key options in the market, the following
three ETFs should be the starting point if you are brave enough
to make a play on this beaten down economy:
iShares MSCI Russia Capped ETF (
The entrant from iShares in the space is ERUS, a fund that
follows the MSCI Russia 25/50 Index. This index produces a fund
that holds 28 securities and has a heavy concentration in the top
three companies that make up nearly 77% of total assets.
The fund manages an asset base of $206.8 million and trades at
volume levels of 0.2 million shares a day (
The Truth about Low Volume ETFs
Additionally, energy firms make up nearly 51.9% of total
assets in ERUS, while the next biggest sector, financials,
occupies just 17.4% in comparison. ERUS, which charges investors
60 basis points a year for its services, slightly beat out its
counterparts in the space over the past six months by losing
"just" 11.7% in the period.
Market Vectors Russia Small-Cap ETF (
For investors looking for a small-cap play on the Russian
economy, RSXJ represents a solid choice. The fund provides
exposure to 26 companies that are either domiciled in Russia or
generate a substantial portion of their revenues in the country.
The fund manages an asset base of $12 million.
While its focus might be on pint-sized securities, the product
still has a heavy focus on the energy sector as RSXJ puts 26.1%
of its assets in energy firms, 19% in industrials, and 18.8% in
Go Green with These 3 Clean Energy ETFs
The product charges investors a net expense ratio of 67 basis
points a year but has had an extremely rough year-to-date period,
losing 7.94% in the period. This level is slightly higher than
its large-cap counterparts, but this could make the fund a star
performer if the Russian economy rebounds in 2013.
Market Vectors Russia ETF (
For investors seeking the biggest and most liquid option in
the Russia ETF world, look no further than RSX. The product
trades about 5.5 million shares a day and holds $1.1 billion in
assets, suggesting tight bid ask spreads for investors.
The fund invests its asset base in a portfolio of 48
securities and appears to be concentrated in the top ten
holdings. The top ten holdings constitute 60.56% of the total
In terms of sector exposure, energy dominates, making up
nearly two-fifths of the total portfolio. It is closely followed
by the materials sector, which accounts for another quarter of
the assets. RSX has a net expense ratio of 62 basis points a year
and has slumped by 11.8% in the year-to-date period (
Who says iShares ETFs are not cheap?
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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS RUSSA (ERUS): ETF Research Reports
MKT VEC-RUSSIA (RSX): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
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