Russia ETFs: Immune to Emerging Market Weakness? - ETF News And Commentary
It has been a brutal stretch for many of the world's top
emerging markets in 2013, as several have struggled to keep their
stock prices afloat in year-to-date terms. Top markets like Brazil
and India have slumped under the weight of their currencies, while
less popular-but still huge-markets like Indonesia and Turkey are
facing issues of their own.
While China has begun to turn it around lately, and other emerging markets have come on strong in recent sessions, the real stalwart in the developing world has undoubtedly been Russia. The country has managed to break the trend in the emerging market space, and hasn't plunged like many of its counterparts, suggesting it has been a much less volatile pick in the segment (see all the broad Emerging Market ETFs here ).
Inside Russia's Strength
The main reason for Russia's strong performance as of late is oil. The country is by some measures the top producer of crude oil in the world, and with recent tensions and an improving developed world economy, oil demand has been relatively high. This has kept the price of crude above $100/bbl. as of late, and with current trends, many are looking for this price to hold in the near term as well.
Furthermore, Russia actually has a current accounts surplus and doesn't have many issues from a fiscal perspective. This is in stark contrast to many other emerging markets-specifically India, Brazil and Indonesia-which have fallen by the wayside thanks to currency weakness and concerns over balance sheets.
"Everyone is asking what emerging market countries are most vulnerable, and it is mainly those with large current account deficits and large pools of foreign debt," said Marcus Svedberg , chief economist at East Capital in a FT article. "On both those counts, Russia looks quite healthy".
How to Play
Given this situation, investors may want to consider a closer look at Russia investments. The ruble looks to maintain more of its strength than other emerging markets, while a firm oil price will undoubtedly help the Russian economy as well.
For investors seeking to tap into this trend, there just a few Russian-based companies that trade on American exchanges that are available choices. Instead, an ETF approach could be the way to go, as these could give investors broader exposure to more companies in the nation that are pretty much impossible to invest in by the average investor right now (read Avoid These 3 Emerging Market ETFs ).
Below, we highlight a few such Russian ETFs which investors may want to consider if they believe these positive relative trends can continue for this huge emerging market:
Market Vectors Russia ETF ( RSX )
Easily the most popular Russia ETF, this product trades over four million shares a day, and has assets under management of over $1 billion. The ETF follows the Market Vectors Russia Index, holding about 50 stocks in its basket.
Top holdings include Gazprom (9%), Sberbank (7%), and then NovaTek and Lukoil to round out the group. In total, energy makes up 44% of the portfolio, followed by 14% for materials, and then 13% for telecoms.
This ETF has actually turned out the best performance of the group, gaining 10.1% in the past three months (See 3 Emerging Market ETFs Still Up on the Year ).
iShares MSCI Russia Capped ETF ( ERUS )
This iShares entrant in the Russia space isn't exactly unpopular, as the product has about a quarter billion in assets and half a million shares of volume a day. The product tracks a smaller index of companies though, holding just 25 stocks in its basket.
The result of this focus is a more concentrated holdings profile with Gazprom, Lukoil, and Sberbank combining to take up over 40% of the assets. Meanwhile, from a sector look, energy accounts for 55% of the portfolio, while financials (15%), and materials (10%), round out the top three.
This ETF has moved higher by 8.7% in the past three months.
SPDR S&P Russia ETF ( RBL )
RBL is the least popular of the three large cap Russia ETFs, though it is also the cheapest by a few basis points. The product tracks the S&P Russia BMI Capped Index, holding roughly 50 companies in its basket.
Gazprom and Lukoil take the top two spots, accounting for roughly 30% of assets, while energy stocks in total account for half the fund. For the rest of the portfolio, financials, materials, and telecoms also receive at least 10% of assets too.
In the past 90 days, RBL has moved higher by 8.6% (also see the Guide to Small Cap Emerging Market ETFs ).
Market Vectors Russia Small-Cap ETF ( RSXJ )
For a small cap approach to the Russian ETF market, investors have RSXJ. This product tracks the Market Vectors Russia Small-Cap Index, giving exposure to roughly 30 stocks that do a significant amount of their business in Russia.
In terms of sector exposure, energy takes the top spot at 22%, followed by industrials, real estate, and utilities, all of which get double digit allocations as well. Investors should note that due to Van Eck's approach, several of the top companies in the fund are based outside of Russia, though they do most of their business in the nation.
Over the past three months, RSXJ has added about 3.1%.
Most emerging markets have struggled lately, with losses seen in many nations' stock indexes. However, Russia has avoided the worst of this selling pressure, holding up pretty strong in comparison.
The country is buoyed by a strong fiscal position, a firm price for its vast array of hydrocarbon exports, helping to keep its current account favorable, and its currency on track. Thanks to this, Russia could be a solid pick for outperformance in the emerging market world, meaning that any of the above ETFs may be intriguing short term selections for those looking for a better choice in developing markets at this time.
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ISHARS-MS RUSSA (ERUS): ETF Research Reports
SPDR-SP RUSSIA (RBL): ETF Research Reports
MKT VEC-RUSSIA (RSX): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
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