How Russia’s Rebound Could be Good for Investors

Doug Fabian
Posted: Jul 04, 2014 12:01 AM
How Russia’s Rebound Could be Good for Investors

Russia’s developed economy is the eighth largest in the world, with a rich array of natural resources: timber, precious metals and fossil fuels. The country’s workforce is highly educated, and its economy is largely privatized. However, many people regard Russia as an unstable market with poor or even punitive business regulations, so Russian stocks tend to trade at a discount. If you want to take advantage of this disparity, you can consider investing in the Market Vectors Russia ETF (SX).

RSX seeks to replicate, before fees and expenses, the performance of an index of the largest and most liquid Russian companies. Market Vectors defines such Russian companies as those that are incorporated inside the country, generate at least 50% of their revenues inside the nation’s borders or hold at least 50% of their assets in Russia. RSX’s single-country focus also limits its diversification.

This exchange-traded fund (ETF) is down 8.56% for the year, but this actually represents the beginnings of a fantastic recovery, as RSX plunged due to the Crimean dispute with Ukraine. With the Ukrainian situation simmering down, RSX now has climbed above both its 50-day and 200-day moving averages. This ascent also matches historical trends: RSX tends to rise towards the end of the summer. For investors interested in dividends, this fund offers a yield of 2.95%.

RSX’s top 10 holdings make up 59.45% of its assets. The top five of these are Gazprom (OGZPY), 8.65%; Lukoil (LUKOY), 7.85%; Sberbank (SBRCY), 7.44%; OAO Novatek (NOVKY), 6.36%; and Norilsk Nickel (NILSY), 6.13%. The portfolio is heavily weighted to the energy sector, with 41.99% of its assets positioned there. But significant holdings also include Basic Materials, 16.36%; Communication Services, 13.07%; and Financial Services, 10.56%.

Russia is a part of the so-called BRIC countries — Brazil, Russia, India and China. All four of these countries have slumped since the 2008 global financial crisis. But with the slow growth in the U.S. stock market in 2014, investors are returning to these emerging markets for potential growth. There appears to be plenty of continuing upside in a relatively cheap Russian market, and one way you could invest in it is through Market Vectors Russia ETF (RSX).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

In case you missed it, I encourage you to read my article from last week about how you can keep up with global emerging markets.