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Russia Out of Recession: ETFs in Focus

 

Russia is finally out of its longest recession in two decades. According to revised calculations by Bank of Russia’s research and forecasting department, it ended a few quarters before than what was earlier estimated.

 

One of the major contributing factors was the reclassification of military spending, which includes a shift to internationally accepted standards for calculating economic results. The new methodology gives more weight to weapons and other military programs. Thus, the output did not change, what changed was the way it was accounted for.

 

Another factor was the rise in oil price owing to the production cuts following the OPEC agreement. The Russian economy seems to be heavily dependent on the energy sector. Oil and gas contributed 40% of Russia's budget revenues in 2016. Russia overtook Saudi Arabia in December in terms of oil production after the OPEC agreement in November 2016 (read: What's Driving Russian ETFs to 52-Week High?). 

 

The Russian economy is expected to get a lift if the Trump administration decides to relax the sanctions imposed in response to the Russian military intervention in Ukraine, which began in late February 2014.  A majority of economists believe the ruble would gain around 5-10% if it happens as per a survey conducted by Bloomberg (read: Investing in the Trump Putin Relationship).

 

Given the present scenario in the Russian economy, we can focus on the following ETFs:

 

iShares MSCI Russia Capped ETF ERUS

 

This fund is an investment vehicle offering exposure to Russian equities. It enables investors to gain from the tremendous potential of this BRICS nation if they are willing to accept the tremendous risks that come along with it. It has a volume of around 318,000 shares a day (read: Media & Russia: 2 ETFs Trading with Outsized Volume).

 

This ETF is heavily concentrated with over 60% allocated to its top 10 holdings and around 50% to the energy sector. It’s relatively costly with an expense ratio of 62 bps a year and manages AUM of $434.3 million. This ETF returned -6.21% in the year-to-date timeframe and 29.45% in the past one year. The fund has a Zacks Rank #3 (Hold) with a High-risk outlook.

 

VanEck Vectors Russia ETF RSX

 

RSX offers exposure to large cap and mid cap Russian equities. It might appeal to investors looking to gain exposure to this emerging market nation by accepting the significant volatility risk associated with it. The fund has a volume of around 9.4 million shares a day.

 

This ETF is heavily concentrated with over 57% allocated to its top 10 holdings and around 38% to the energy sector. It’s relatively costly with an expense ratio of 63 bps a year and manages AUM of $2.5 billion. This ETF returned -5.37% in the year-to-date timeframe and 28.17% in the past one year. The fund has a Zacks Rank #3 with a High-risk outlook.

 

SPDR S&P Russia ETF RBL

 

RBL is a relatively less popular fund in this space offering exposure to Russian equities, with a paltry volume of 16,000 shares a day.

 

This ETF is heavily concentrated with over 67% allocated to its top 10 holdings and around 44% to the energy sector. It’s relatively cheaper compared to the other funds discussed and has an expense ratio of 59 bps a year and manages AUM of $31.5 million. This ETF returned -5.02% in the year-to-date timeframe and 30.24% in the past one year. The fund has a Zacks Rank #3 with a High-risk outlook.

 

Bottom Line

 

Even though the Russian economy is now out of recession, the growth forecasts are not that appealing. According to the central bank governor, Elvira Nabiullina, to unlock further growth opportunities, the country will need to implement reforms, without which, growth will be capped at 1.5-2%. Owing to these facts, we believe it’s best to remain on the sidelines as of now. 

 

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ISHARS-MS RUSSA (ERUS): ETF Research Reports
 
VANECK-RUSSIA (RSX): ETF Research Reports
 
SPDR-SP RUSSIA (RBL): ETF Research Reports
 
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