It has been another volatile year for Russian stocks and the
corresponding ETFs. The Market Vectors Russia ETF (NYSE:
), the largest and oldest Russia-specific ETF, is up just five
percent on the year, a performance that ranks third among the
four largest ETFs devoted to the BRIC nations.
Amid falling oil prices and the potentially negative impact
another possible 12 years of Vladimir Putin's rule could have on
Russian equities, the
market looks cheap
and some analysts and investors are taking notice.
a recent blog post
, iShares Global Chief Investment Strategist Russ Koesterich said
"the most obvious attraction of this market is its low
As of September 30, RSX had a price-to-earnings ratio of 6.54
and a price-to-book ratio of 0.88, according to Market Vectors
data. By comparison, the iShares MSCI Emerging Markets Index Fund
) had a P/E ratio of 17.3 a price-to-book ratio of three as of
"While most emerging markets look inexpensive compared to
their history, Russia is an extreme case," wrote Koesterich. "In
the past, Russian stocks have normally traded at a discount of
around 30% to other emerging markets. Today, stocks in Russia
trade at a 53% discount. Looking at price-to-book, the story is
the same. The MICEX is currently trading at a 20% discount to its
book value, one of the cheapest valuations in the world."
As many investors know, there is no such thing as free lunch
in the financial markets. That means Russia's attractive
valuations come with a caveat: Volatility. On a year-to-date
basis, RSX and the rival iShares MSCI Russia Capped Index Fund
) have volatility rates of 29.2 percent and 28.5 percent,
respectively. In the case of ERUS, that means the ETF has been
250 basis points more volatile than the next-most volatile major
ETF tracking a BRIC nation, that being the WisdomTree India
Earnings ETF (NYSE:
For its part, RSX has been 550 basis points more volatile than
the iShares MSCI Brazil Index Fund (NYSE:
A large reason for that volatility is Russia's heavy
dependence on energy production as a drive of economic growth.
That dependence is reflected in the sector weights of Russia
ETFs. RSX had a 41.4 percent weight to energy names at the end of
the second quarter. ERUS devotes 55 percent of its weight to the
sector while the SPDR S&P Russia ETF (NYSE:
) allocates over half its weight to energy names.
Despite the lack of diversity at the sector, there are
statistics to support at bull case for Russia and the
aforementioned ETFs, including the ability of Russian companies
to generate profits.
"Companies on the MICEX exchange, have a return-on-equity
(ROE) of over 18%," wrote Koesterich. "This is in line with both
Russia's long-term average as well as the average for other
emerging markets. In fact, when you compare valuations with
market profitability, Russia appears to be one of the more
under-valued markets globally."
Russian inflation is also benign, having been more than cut in
half since 2011. Plus, the country's balance sheet is sturdier
than many of its developed market peers. As Koesterich notes,
Russia "runs both a current account and budget surplus and has
little to no any external debt."
RSX and ERUS are likely to remain the first stopping for
investors looking for Russian exposure via ETFs, but small-caps
should not be overlooked. The Market Vectors Russia Small-Cap ETF
) features a diminutive-by-comparison 22.9 percent weight to the
energy sector with its own compelling valuations. At the end of
the second quarter, RSXJ had a P/E ratio of 3.66 with a
price-to-book ratio of just 0.85, according to Market Vectors
For more on Russia ETFs, click
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