The SPDR S&P Russia ETF (RBL) began trading on Thursday, becoming just the second U.S.-listed ETF offering exposure to one of the world’s largest countries and most unique economies. RBL will seek to track the performance of the S&P Russia Capped BMI Index, a float adjusted market cap-weighted benchmark consisting of publicly-traded companies domiciled in Russia.
Russia’s commodity-intensive economy was battered during the recent downturn as demand for raw materials and energy resources plummeted. Since bottoming out, however, Russian equities have delivered huge returns, thanks in large part to a surge in demand for materials from China, Brazil, and other emerging markets (see the Top Ten Performing ETFs Since The Market Bottom).
Russia is by far the world’s largest country, covering more than 11% of the earth’s land area. It’s also the largest producer of natural gas and oil and home to massive deposits of countless other resources, including coal, timber, and industrial metals. Natural resources account for a significant portion of Russia’s exports, creating a stock market that is rather volatile, even by emerging market standards. When commodity prices show strength, as they have over the last year, Russian equities tend to surge. But when demand for oil, gas, and metals dips, stiff headwinds to economic growth form.
The Russian economy has become more diversified in recent years as the telecom and financial industries have expanded considerably. In an article titled “Russia Forward!” president Dmitry Medvedev recently conveyed the need to transform the Russian economy by stimulating innovation and generating new technologies. “Should we drag a primitive economy based on raw materials and endemic corruption into the future?” Medvedev wrote in September. The government has devised a plan to develop a Russian technology and innovation hub, although progress towards implementing the vision has been minimal.
But the composition of the index underlying RBL reveals the extent to which the country still depends on commodity-related businesses. The energy sector accounts for about 49% of the benchmark while materials account for another 18%. Financials (12%) and telecom (9%) receive the next-highest weightings.
The risks associated with Russian equities don’t stop with the dependence on commodity prices. Russia consistently ranks as one of the most corrupt nations and received a low “Innovation Score” from the World Economic Forum’s Competitiveness Report. The Russian ruble has been extremely volatile in the past, and legal protections for foreign businesses are perceived as very weak.
Still, the potential for growth in the resource rich nation is attractive to many investors, especially as signs of economic progress and political reform emerge. Yields on Russian dollar bonds recently fell below 5% for the first time as rising oil prices boosted investor confidence. The current yield is about 80 basis points below similar bonds issued by Brazil. Russia is preparing for its first foreign currency bond sale since defaulting on domestic debt and devaluing the ruble in 1998. And despite the recent run-up, the index tracked by RBL remains very attractive from a price-to-earnings perspective; at the end of February forward looking P/E was under 9.
Russia ETF Options
|Data as of 12/31/09 for RSX and 2/28/10 for RBL. RBL data reflects the underlying index.|
RBL will compete most directly with the Market Vectors Russia ETF (RSX), a fund linked to the DAXglobal Russia+ Index. RBL and RSX will be similar in many ways–both maintain a heavy tilt towards the energy sector–but far from identical. As highlighted in the adjacent table, major differences include the depth of holdings offered, expense ratios, and the weightings given to energy giant Gazprom.
RSX has accumulated more than $1.5 billion in assets, but Russia ETF assets are by far the smallest of any BRIC bloc of countries. China ETFs have aggregate assets of nearly $15 billion, while three ETFs targeting Brazilian equities (EWZ, BRF, and BRXX) have nearly $12 billion. The four India ETFs available to U.S. investors have about $2 billion in assets.
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Disclosure: No positions at time of writing.