iShares continued the expansion of its product lineup on Wednesday, debuting the MSCI Russia Capped Index Fund (ERUS) on the NYSE Arca Exchange. The new ETF will track the performance of the MSCI Russia 25/50 Index, a benchmark that currently includes about 28 individual securities. All 25/50 indexes, such as the benchmark to which the Ireland ETF (EIRL) is linked, are constructed such that no single issuer represents more than 25% of the weight of the index and that all issues that individually represent more than 5% of the weight of the index do not in the aggregate represent more than 50% of the weight of the index. “The new iShares MSCI Russia Capped Index Fund offers greater precision and access to the 12th largest economy in the world1,” said Noel Archard, Head of US Product at iShares, BlackRock. “The new iShares fund further enhances our large single country iShares ETF lineup to respond to requests from financial advisors and investors for greater precision in implementing their international-focused investment strategies and interest in getting deeper access to emerging market stocks to help diversify portfolios.”
Case For Russia
Russia has evolved rapidly in recent decades, transitioning from a centrally-planned economy to a more market-based and global economy. Many industries were privatized in the 1990s, although the government still maintains significant interests in the strategically important energy and defense sectors of the market. Moreover, many of the “privatizations” transferred state-owned companies to politically-connected investors and institutions, resulting in a concentrated equity ownership and a relatively weak private sector [see Emerging Market ETFs: Seven Factors Every Investor Should Consider].
Russia is home to massive reserves of various natural resources, so it isn’t surprising that the Russian economy is one of the most commodity-dependent in the world. In 2009, Russia was the world’s largest exporter of natural gas, second largest exporter of crude oil, and third largest exporter of steel and primary aluminum. This reliance on oil and gas has tied the fortunes of Russia’s economy to the global commodity markets. When oil and gas prices collapsed during the recent downturn, the Russian government spent a significant portion of its massive reserves to slow the devaluation of the ruble and hundreds of billions more to aid cash-strapped Russian companies.
Russia has taken steps to diversify its economy in recent years. The most aggressive component of this initiative focuses around a Silicon Valley-style technology hub that is designed to boost Russia’s tech sector. President Dmitry Medvedev set up Skolkovo, a community outside of Moscow, earlier this year as part of an effort to attract international companies, spur local innovation, and modernize the Russian economy. That effort recently got a huge boost from Microsoft, which pledged to set up a software development R&D center in Skolkovo. “Russia is very well positioned to play a leading role in the changes in our industry … and certainly Microsoft is pleased to participate in supporting companies coming into existence here in Russia and benefiting from the growth of the market,” said Microsoft CEO Steve Ballmer [also see ETF Plays To Follow Cisco Into Russia].
Russia has also staged a revival of its grains sector in recent years, transforming the country from an importer to net exporter. Russia has become a major player in the agricultural industry; earlier this year, widespread fires drastically reduced the wheat harvest and led to export quotas and outright bans on some crops. That development contributed to a global grains shortage that sent prices skyrocketing during the summer months [see Russia ETF On Fire (And Not In A Good Way)].
Despite these efforts, Russia’s economy is still dominated by the oil and gas sector–a fact that is reflected in the weightings of ERUS. About 50% of assets are allocated to the energy sector, followed by materials (18%) and financials (14%).
Beyond the dependence on oil prices, the biggest threats to the Russian economy include a shrinking population, crumbling infrastructure, and widespread corruption [see Seven Most Corrupt Country ETFs]. Recent events have highlighted some of the less flattering sides of Russian society; savage beatings of critical or politically active journalists have become commonplace, while arrests in the cases are a rarity.
Russia is often given a relatively minor allocation in BRIC funds; it accounts for only about 12% of the iShares MSCI BRIC Index Fund (BKF). ERUS will be the third ETF offering pure play exposure to the Russian economy, going head-to-head with products from Van Eck (RSX) and State Street (RBL). Not surprisingly, each of the Russia ETFs available to U.S. investors makes considerable allocations to the energy sector [also read How Emerging Market ETFs Offer A New Way To Invest In Commodities]:
|Ticker||Index||Expense Ratio||Energy Allocation|
|ERUS||MSCI Russia 25/50 Index||0.65%||52%|
|RSX||DAXglobal Russia+ Index||0.62%||47%|
|RBL||S&P Russia Capped BMI Index||0.59%||47%|
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Disclosure: No positions at time of writing.