There may actually be room for two Russia ETFs

For years there was only one Russia ETF that really counted: the Market Vectors Russia (RSX, quote). Since then, iShares has made a big play for its piece of the Russia trade, and some traders have already reaped the rewards.


Image courtesy Klobetime:

The main street of St. Petersburg: Neksky Prospekt

Since launching in November 2010, the iShares MSCI Russia Capped ETF (ERUS, quote) has struggled to hack away at RSX’s stranglehold over the Russia ETF market. 

On a typical day, RSX generates 96.6% of all turnover that we see in the four dedicated Russia ETFs. 

ERUS now picks up almost all the other activity in the category, having pushed its average volume to a healthy 114,000 shares a day — triple where it started 18 months ago.

One of the secrets of the fund’s success is of course marketing. Traders had been begging for an iShares for Russia to match the company’s collection of similar country-focused ETFs, and now that they finally have one, the sheer weight of all those other iShares funds naturally pushes incremental allocations to ERUS.

But the big driver behind ERUS lately is probably the simple fact that it’s outperformed RSX since both funds bottomed out back in October.

In the last six months, RSX has rebounded 26%, but ERUS shareholders have booked a paper gain 9 percentage points above that.

Whenever we compare the two funds, security selection — the specific contents of each portfolio — obviously makes all the difference when it comes to performance.

RSX is famously overloaded with energy and other commodity stocks to reflect the shape of the overall Russian economy. A full 39% of the fund is devoted to energy, with six of the top ten holdings accounting for the bulk of that ultra-concentrated sector bid. Another 22.8% of the fund is invested in raw materials stocks like Norilsk (NILSY, quote) and potash giant Uralkali (URALL, quote). 

ERUS, paradoxically, has outperformed by getting even more overweight energy. Almost 55% of the fund is allocated to stocks like Gazprom (OGZPY, quote) and Lukoil (LUKOY, quote), which account for 33% of its holdings between them.

And as it happens, the more OGZPY in a portfolio since the October rally started, the better the fund has done. Gazprom shares are up 44%, so a trader who was solely invested in this stock would have beaten both ERUS and RSX over that time period.

Does it make sense to give up both Russia ETFs and simply hold Gazprom as a one-share proxy on the entire Russian economy? Not necessarily.

Remember, OGZPY’s fortunes hang on the extremely volatile price of natural gas. In a good period, this gigantic stock surges. In a bad one, the company can be frustrating dead money for months if not years.

And the joy of any emerging market ETF is that it gives you a chance to buy into stories that would otherwise be impossible for U.S. retail traders to play. Both ERUS and RSX, for example, are heavily weighted in companies like Novatek and Magnit — household names in Russia with no exposure on Wall Street.

The Russian consumer economy is more vibrant than ever. That deserves something more than an all-OGZPY Russia allocation in your portfolio. And if you want more energy but a little consumer action, that’s where ERUS can shine.

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