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Conservative ETF Avenue to Russia Soars Again

ETFtrends.com

Notching rebounds of epic proportions, Russian stocks are among the world’s best performers this year and the effect is being felt throughout the exchange traded funds space.

Led by an almost 33% gain for the Market Vectors Russia ETF (RSX) , RSX, the iShares MSCI Russia Capped ETF (ERUS) and the SPDR S&P Russia ETF (RBL) are up an average of 30.8% this year.

Count the WisdomTree Emerging Markets Equity Income Fund (DEM) among the diversified emerging markets ETFs benefiting from rebounding Russian stocks. The $2.36 billion DEM has a Russia allocation of almost 19.1%, making Russia the ETF’s second largest country weight behind China. By comparison, Russia’s weight in the benchmark MSCI Emerging Markets Index and the FTSE Emerging Markets Index combines for just 8%. [Russia Lifts This ETF]

Its dividend emphasis and larger weight to Russia has, at times, been advantageous for DEM. Last year was not one of those times. Bogged down by its larger than average weight to Russian stocks, DEM slid 13.3% as RSX plunged 47.2%. The MSCI Emerging Markets Index and the FTSE Emerging Markets Index fell an average of just 2% last year.

That script is being rewritten in 2015 as DEM is higher by 11.3%, an advantage of 90 basis points over the MSCI Emerging Markets Index and the FTSE Emerging Markets Index. Constituents in DEM’s underlying index are weighed by annual dividends paid, indicating that if Russian dividends deteriorate relative to other emerging markets, the country’s presence in DEM could be reduced. [Sanctions Could Pressure Russia Dividends]

“The strategy has a compelling long-term track record, beating 92% of its peer group since inception, but it has seen disappointing short-term performance, given the recent over-weight to Russia. That said, if the peace in Ukraine holds and oil prices begin to stabilize, DEM may prove to be one of more rewarding allocations among global equities,” WisdomTree Research Director Jeremy Schwartz in a note out last month.

There is added allure for conservative investors considering DEM. The ETF offers more participation in upside for Russian equities than rival funds without having to endure the notorious volatility of Russian stocks that comes along with a single-country fund. The standard deviation on RSX is more than double that of the MSCI Emerging Markets Index. [Big Bets on Risky Russia ETFs]

Not to mention that even with the recent rally, Russian stocks are still deeply discounted relative to their developing world peers.

“Russia stands out, both for its low single-digit number and because it is selling at nearly a 50% discount to its historical median level. Of course, earnings may fall in the next year, given the collapse in oil prices, but even a 50% fall in earnings would leave Russia selling at a large discount to the rest of the emerging market,” added Schwartz.

At the end of January, the trailing P/E ratio on the MSCI Russia Index was 3.4, barely more than half the 20-year median of 6.6, according to WisdomTree data.

WisdomTree Emerging Markets Equity Income Fund

DEM

Tom Lydon’s clients and Todd Shriber own shares of DEM.