Gas Deal Fuels China/Russia ETFs - ETF News And Commentary


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After a decade of negotiation, China and Russia have finally entered into a 30-year natural gas deal wherein Russian natural gas giant Gazprom will supply 38 billion cubic meters of natural gas to China National Petroleum Corp, China's largest oil company, every year starting from 2018. Russia could expand its supplies to a maximum of 60 billion cubic meters.

While the actual value of the deal is still unknown, most of the sources valued the deal at around $400 billion. This mega deal represents a major step not only in the global energy markets but also in the geopolitics over the coming years. This is especially true, as the payments for the natural gas will be made through Russian rubles and Chinese yuan rather than U.S. dollars. This would pave way for other countries to trade in their own currencies (see: all the currency ETFs here ).

Further, Russia is an energy-rich nation and the world's largest energy exporter while China is the second largest energy importer. The deal will be beneficial for both the countries as Russia would be able to expand its vast natural gas market in Asia, and China will have more energy source to meet the growing demand.

The deal has taken place at a time when the U.S. and European Union (EU) have imposed tough sanctions against Russia for the annexation of Crimea. The EU has also threatened to curtail its gas imports from the country. Russia accounts for one-third of total natural gas exports to EU (read: 3 Commodity ETFs Surging on Russia Sanctions ).

For energy-hungry China, which is struggling with major pollution problems given its heavy reliance on coal for generating power, the contract would provide a key source of clean energy to sustain industrial and economic growth.

Further, though the price for gas has not been disclosed, market participants expect that China will pay in the range of $9-$10 per million British thermal units (mmBtu). This is cheaper than $10.60 per mmBtu prevailing in some markets of Western Europe and $10.84 per mmBtu LNG average, which China paid for importing gas in April.

ETFs in Focus

Given this, most investors duly turned their focus to Russia and China markets in order to reap advantages from the gas deal. While there are several options to play these two markets, we have highlighted three ETFs that might be considered solid picks in the days ahead.

iShares MSCI Russia Capped ETF ( ERUS )

This fund follows the MSCI Russia 25/50 Index, holding 23 stocks in its basket. About half of the fund's portfolio is skewed toward energy followed by financials (17.37%) and materials (11.30%). Gazprom occupies the top position with 21.32% share while other securities hold less than 12% of assets.

The ETF has been able to manage $322 million in its asset base and trades in a good volume of over 551,000 shares. It charges investors 61 bps in annual fees. ERUS added 13.7% over the trailing one-month period despite the turmoil in Russia (read: Russia ETFs in Focus on Credit Downgrade, Rate Hike ).

Market Vectors Russia ETF ( RSX )

This ETF provides exposure to the companies, which are domiciled and primarily listed in Russia or generate majority of their revenues in Russia. This could be easily done by tracking the Market Vectors Russia Index. The fund has amassed $1.6 billion in its asset base while sees heavy volume of nearly 6.7 million shares. Expense ratio came in at 0.63%.

Holding 49 stocks in its basket, the product allocates higher to the top two firms - Gazprom and Lukoil - with at least 8% share each. Further, energy dominates the fund's portfolio at 43% from a sector look while materials, telecom and financials account for double-digit allocations. RSX had a solid run over the past one month, gaining over 13%.

iShares FTSE China 25 Index Fund ( FXI )

This ETF provides concentrated exposure to a small basket of 26 Chinese large cap stocks by tracking the FTSE China 25 Index. The product has over $4.8 billion in AUM and is extremely liquid, trading in volumes of more than 23 million shares a day. FXI charges 73 bps in fees per year from investors (read: Invest Like Jim Rogers with These ETFs ).

The ETF is largely concentrated on its top 10 holdings with over 60% of total assets. In terms of sector holdings, financials dominates the fund with more than 55% share while telecom, oil & gas, and technology provide a decent mix in the portfolio. The fund added about 4.7% in the trailing one-month period.

Bottom Line

While Russian ETFs are turning around this month driven by cheap valuation and the gas deal, the long-term outlook remains bleak given the ongoing geopolitical tensions in Russia. This is especially true as both the Russian funds carry a Zacks ETF Rank of 5 or 'Strong Sell' rating, suggesting that these would underperform the broader market over a one-year period.

On the other side, the China ETF has a decent Zacks ETF Rank of 3 or 'Hold' rating, suggesting room for upside.

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ISHARS-MS RUSSA (ERUS): ETF Research Reports

MKT VEC-RUSSIA (RSX): ETF Research Reports

ISHARS-CHINA LC (FXI): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: EU , ERUS , RSX , FXI

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