Russian stocks have on a decline so far this year and they
have been very volatile too. Low investment and structural
factors are leading to the slow growth of the economy, which in
turn have hurt the stock market.
Russia is the world's top producer of crude oil and has more
natural gas than any other country on the planet, ensuring that
it will be a top player in the energy space for decades to come.
However, investors should note that the sector has been
In fact, , largest natural gas extractor in Russia the state
run Gazprom, which is responsible for about half of the
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 losing its pace
attributable to the weakness in the Eurozone, which accounts for
about half of Russian trade, thereby obstructing corporate
investment and reducing demand for commodities.
However, Russia's industrial sector 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.
Oil and gas which account for a large portion of Russian
export provided some support to Russia's income level . Oil and
gas account for 50% of federal government revenue and around 20%
of Russia's GDP.
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, 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% (down from an earlier outlook of 4.3%) in 2014 and
4.1% (4.5% projected earlier) in 2015 due to weakness in
exports, capital inflows, investment, industrial production
and retail growth (
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The ministry has also revised its investment growth forecast
downwards to 6.6% from 7.3% for 2014 and to 7.2% from 7.9% for
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 2014, and
expects just $10 billion inflow in 2015, which is also a downward
revision from an earlier estimated figure of $40 billion.
Currently, for investors looking to play the Russian equity
space, there are three viable options. While the options look
similar, each of the products has its own key differences that
investors should be cognizant of before attempting to make a bet
on the beaten-down Russian economy:
iShares MSCI Russia Capped ETF (
This product from iShares 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 75% of total assets.
The fund manages an asset base of $238.5 million and trades at
volume levels of 0.2 million shares a day (
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Energy firms make up nearly 50.1% of total assets in ERUS,
while the next biggest sector, financials, occupies just 18.4% in
comparison. ERUS, which charges investors 60 basis points a year
for its services, generated a negative return of 8.5% in the
year-to date 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 26.7%
of its assets in energy firms, 19% in industrials, and 17.6% in
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The product charges investors a net expense ratio of 71 basis
points a year but has had an extremely rough year-to-date period,
losing 7.02% in the period. This level is slightly higher than
its large-cap counterparts.
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 3.6 million shares a day and holds $1.5 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 60.9% 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 9.9% in the year-to-date period (
Who says iShares ETFs are not cheap
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ISHARS-MS RUSSA (ERUS): ETF Research Reports
MKT VEC-RUSSIA (RSX): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
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