One of the interesting developments to come out of the turmoil in global equity markets over the last two years is the surge in interest in the world’s emerging economies. While developed markets continue to be plagued by mounting debt, rising unemployment, and other macroeconomic issues, emerging markets have raced ahead, establishing themselves as the clear drivers of global growth. Among emerging markets, China, Brazil and India receive much of the attention; Russia is often overlooked despite its status as one of the world’s largest emerging markets and top performers over the past year. Although Russia saw an economic downturn in 2008-2009, with oil prices dropping from $140 to $40 per barrel, its economy has been steadily rising since its turnaround in the second quarter of 2009. With its commodity-intensive economy, surges in oil and raw material prices have boosted Russia’s market (see Top Ten ETF Performers Since The Market Bottom).
For U.S. investors seeking ways to play the Russian market through ETFs, there are two primary options available: the SPDR S&P Russia ETF (RBL) and Market Vectors Russia ETF (RSX). While these two funds offer generally similar exposure to the unique economy of Russia, there are a few important differences that investors should consider.
Indexes & Holdings
The two ETFs track indexes with similar focuses: publicly-traded companies domiciled in Russia. RSX tracks the DAXglobal Russia+ Index, a benchmark that includes companies that trade in Russia or on leading global exchanges. RBL tracks the S&P Russia Capped BMI Index, which is a float-adjusted market cap index designed to define and measure the investable universe of publicly-traded companies domiciled in Russia.
RSX and RBL share five of their top ten holdings, giving them similar exposure. RSX has a total of 43 holdings (see them all here) while RBL has about 34 securities. Gazprom is a major holding for each ETF, but its weighting is dramatically different; the oil and gas giant makes up nearly 8% of RSX and about 16% of RBL. Lukoil, another mega cap gas company, is RSX’s largest holding at 8% of assets; it accounts for about 8.5% of RBL.
RBL is more “top-heavy” than RSX; its top ten holding make up about 70% of total assets. RSX’s top ten holdings make up about 58% of the fund.
Each ETF focuses heavily on the energy sector, as evidenced by the substantial weights in Gazprom and Lukoil; about 39% RSX and 42% of RBL consist of energy stocks. But after that, some differences in sector allocations begin to appear. Materials make up about 26% of RSX, but only 16% of RBL. The SPDR ETF gives a bigger allocation to telecom (21%), which makes up only about 8% of RSX. Financials make up about 10% of each ETF, reflecting increased diversification within the Russian economy in recent years. According to Russian president Dmitry Medvedev, Russia plans to expand sectors other than energy to help strengthen their economy and weaken the dependence of government revenues on oil and gas prices.
Performance & Fees
As far as performance is concerned, RSX has done remarkably well over the past year (at least until it plunged about 17% in last week’s massive sell-off). Even after that major pullback, RSX still has a 52 week return of more than 40%, although it’s now down nearly 10% on the year.
RBL is a relatively new ETF, launching in March of this year. After flying out of the gates, the last week has sent it reeling; RBL lost a more modest 15% during the last five sessions, and its return since inception is now about -13% (see more information on RBL’s returns here).
As far as expenses are concerned, RSX charges 0.62% and RBL charges 0.59%.
On the surface these two funds seem very similar. They both track public companies in Russia, with significant overlap among holdings and some similar sector weightings. But there are several key differences to take into account. RSX is a more diverse fund, with more holdings and a significantly smaller allocation given to the top ten assets. However, RBL’s significant allocation to the generally stable telecom sector may make it less volatile that RSX (this was certainly the case during the tumultuous trading sessions last week (see Five Defensive ETFs To Own When The Market Corrects).
Although the Russian economy of tomorrow may be a financial and technological leader, the Russia of today remains dominated by the energy sector, making it a risky (but potentially very rewarding) play. For investors looking to make a play on Russia, RSX and RBL both present interesting—and unique—options.
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Disclosure: no positions at time of writing