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A Comprehensive Guide to Russia ETFs

After struggling with falling energy prices and western sanctions following the Ukraine crisis, Russia seems to be coming back on track. The Russian benchmark stock index, the Micex, recently touched its seven-year nadir while major ETFs tracking the Russian equity market have been reflecting gains (read: Russia: Surprise BRIC ETF Winner So Far This Year ).

Much of the recovery in the country is linked to the oil and gas industry as the state derives about half of its revenues from the industry and 25% of its GDP is based on it. Oil prices have been recovering on rising geo-political tensions across the world ranging from the situation in Syria and Northern Iraq to the recent downing of a Russian jet by Turkey. International benchmark Brent Crude reached its two-week high of above $46 recently, a rebound from the six-year low of roughly $43 in August.

The impact of the Syrian crisis may look short-lived but that's not the end of the story. Recently, Saudi oil minister indicated at a possible cooperation between OPEC and non-OPEC nations to deal with the over-a-year-long production turf war to stabilize the oil market at their meeting on December 4.

Stabilization in Russian ruble is another reason for the inflow in Russian ETFs. A weak ruble in the past has been the major factor for investors' distaste for these ETFs as they lower dollar-denominated returns. Ruble has rebounded about 34% from its year-to-date low of around 50 to around 65 against the greenback currently. In fact, Goldman Sachs ( GS ) expects ruble to be one of the good performing currencies in 2016 along with the U.S. dollar and the Mexican peso.

Moreover, increasing prospects of cooperation between Russia and the west over the war against the extremist group Islamic State have been boosting investor confidence. This led to the possibility of the U.S. lifting economic sanctions imposed on Russia following the Ukraine crisis.

Recently, the International Monetary Fund (IMF) released projections that indicated stabilization in the Russian economy in 2016. IMF expects the economy to contract only 0.6% next year following a 3.8% squeeze in 2015, given the impact of lower oil prices . It further predicted inflation to fall to 12.7% at the end of this year and will continue to do so in 2016 from the current rate of 15.7%. It also hinted at improvements in the trading situation in the country despite its high dependence on oil exports (read: Russia ETFs Making a Strong Comeback ).

Below we discuss three ETFs tracking the Russian equity market that posted double-digit gains in the year-to-date timeframe (as of November 25, 2015). Investors should closely monitor the movement of these ETFs in the days ahead, particularly following the OPEC meeting next week (see all European Equity ETFs here).

Market Vectors Russia ETF ( RSX )

This is the most popular ETF with an AUM of nearly $2 billion. The fund tracks the Market Vectors Russia Index with the highest exposure to the energy sector (42.9%), followed by materials (17.8%) and financials (13.9%). It has a basket of 37 stocks with top three holdings including Sberbank of Russian Federation, Gazprom ( GZPFY ) and Lukoil ( LUKOY ). The ETF trades in a solid volume of 11.9 million shares per day and charges 63 bps in annual fees. It added 19.7% in the year-to-date timeframe and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

iShares MSCI Russia Capped ( ERUS )

This ETF tracks the MSCI Russia 25/50 Index, measuring the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in Russia. The ETF with a basket of 27 stocks is also heavily weighted to energy sector (53.4%) followed by financials (18%) and materials (9.8%). Gazprom, Pjsc Gazprom and Sberbank of Russia are the top three holdings in the fund. ERUS has an AUM of $240 million and exchanges roughly 411,000 shares in hand per day. It charges 62 bps in annual fees and returned around 16.8% so far this year. It has a Zacks ETF Rank #4 with a High risk outlook.

SPDR S&P Russia ETF ( RBL )

RBL follows the S&P Russia Capped BMI Index with a basket of 43 stocks. It also gives the highest preference to the energy sector (47.1%) followed by financials (14.8%) and materials (11.3%). Gazprom, Lukoil and Sberbank occupy the top three spots in the fund. The product has amassed around $26 million in assets and trades in a paltry volume of roughly 9,300 shares per day. It charges 59 bps in investor fees and gained 17.8% in the year-to-date period. It carries a Zacks ETF Rank #4 with a High risk outlook (read: Should You Try Bottom Fishing in Russia ETFs on Rate Cut? ).

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MKT VEC-RUSSIA (RSX): ETF Research Reports

ISHARS-MS RUSSA (ERUS): ETF Research Reports

SPDR-SP RUSSIA (RBL): ETF Research Reports

GOLDMAN SACHS (GS): Free Stock Analysis Report

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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.


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

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