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Sanctions Could Pressure Dividends for Russia ETFs

ETFtrends.com

These are not go-go days for Russia exchange traded funds in terms of performance, but investors do not seem to mind.

Lured by some of the lowest valuations in the developing world, investors continue to allocate cash to ETFs such as the Market Vectors Russia ETF (RSX) . From early August through late October, RSX’s shares outstanding count ballooned nearly 60%. RSX, the largest, oldest and most heavily traded Russia ETF, has added $239.3 million in new assets since the start of the fourth quarter. [Heard it Before With Russia ETFs]

However, one of the more compelling reasons to stick with Russia ETFs amid slumping oil prices and lingering geopolitical concerns could suffer a blow at the hands of Western economic sanctions levied against the country.

Once looked as one of the brightest stars in terms of emerging markets dividends, Russia’s payouts could suffer as sanctions crimp profits for some Russian firms, including some that make homes in ETFs like RSX.

Relte Stephen Schutte of Markit notes in a piece for the Financial Times that the research expects dividends for Russia benchmark Micex 50 to be flat this year and in 2015.

Tepid, or worse yet, no dividend increases from Russian firms represent a blow to President Vladimir Putin’s bid to force Russia’s highly profitable firms to pay out at least 25% of net income in the form of dividends in an effort to stoke foreign investment in the country. [Russia Tries to be a Dividend Player]

Markit expects Russian energy names to pare dividends by 6% while forecasting a 14% drop in payouts by the country’s financial services firms. Those sectors combine for 55.5% of RSX’s weight. Markit said it expects that the only major Russian companies affected by Western sanctions that will boost payouts next year are Lukoil and Novatek. Those firms combine for nearly 14% of RSX’s weight.

RSX has a 30-day SEC yield of nearly 3.1%.

With a nearly 20.5% weight to Russia, the WisdomTree Emerging Markets Equity Income Fund (DEM) could also be affected by reduced Russian dividends, though DEM does feature Lukoil among its top-10 holdings.

Although DEM has been previously criticized for its overweight to Russia with critics asserting the ETF is more volatile as a result, those complaints miss the mark. For example, the WisdomTree Emerging Markets Equity income Index (WTEMHY), DEM’s underlying index, has a beta of just 0.81 against the MSCI Emerging Markets Index since June 2007, according to WisdomTree data. [Russia's Rise Lifts This Broader EM ETF]

Importantly, 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.

DEM’s Russia weight is also buffered by a combined weight of over 29% to China and Taiwan. China is the largest emerging markets dividend payer in dollar terms while Taiwan has long had one of the most favorable dividend policies in the developing world. DEM has a 30-day SEC yield of 4.51%.

Market Vectors Russia ETF

rsx

Tom Lydon’s clients own shares of DEM.