Does RSX Still Have Room to Run?

While the “R” in the acronym “BRIC” may stand for the least-talked-of emerging market in the group, Russia has seen an astonishing recovery in 2009. The Market Vectors Russia ETF (RSX) returned more than 103% for the three-month period ending June 5, a testament to the recovery of the Russian economy after last year’s drop. Russia’s current strength may be due to a “not-as-bad-as-we-thought” mentality, but the correction due from such sentiment could lead to further short-term growth. As oil prices recover and currency fears subside, RSX could continue to offer value in a well-diversified portfolio over the short term.

Russia’s substantial 2008 drop, a record 76% for the benchmark RTS Index, can be tied to the burst of the oil bubble late last year. With a large percentage of top holdings tied to the commodities sector, RSX tracks commodity prices closely. While RSX’s price dropped dramatically along with oil prices late last year, the reemerging demand from emerging markets has helped boost the price of scarce oil reserves in the short term.

RSX, the nation’s first ETF to focus on Russia, tracks the price and yield performance of the DAX-global Russia Index. RSX’s index contains companies that are domiciled in Russia and traded on exchanges across the globe. The fund currently contains 35 components involved in such businesses as oil and gas exploration and production, telecommunication, steel production, mining, and electricity generation. The top sector allocation for RSX is currently oil and gas, with 39.9% of assets, followed by the iron/steel and telecommunication sectors, with 16.8% and 16.5% allocations, respectively.

General Motors’ (GM) Chapter 11 bankruptcy filing recently put RSX’s top component, Russian banking giant Sberbank, in the headlines as rumors swirled. On June 6, German carmaker Opel denied reports that half of its government bridge loan, designed to shield it from parent company GM’s bankruptcy, would be used to help plants outside the German market. Sberbank, anticipated to take on a 55% stake of the Opel deal with Canadian car parts group Magna, announced that it expected the deal to be completed by the end of 2009. Whether Sberbank and Magna take on the originally anticipated 55% or the recently speculated 100 million euros of cash, the Opel deal will represent a major financial commitment on the part of the Russian bank.

RSX’s second-largest component, OAO Gazprom (OGZPY.PK), is both the largest company in Russia and the largest oil and gas company in the world. The face of Gazprom has been transformed over the course of the breakup of the Soviet Union, privatization in the mid to late ’90s and scandals in the first years of the 21st century. The line between the Russian state and state-owned Gazprom has been blurry during the many transitions, and arguably became vaguer with the swearing in of Gazprom’s former chairman of the board, Dmitri A. Medvedev, as president of Russia.

Lukoil (LUKOY.PK), RSX’s third-largest component, is also a giant in the global oil industry. As compared to Gazprom, Lukoil’s senior management has traditionally not been as closely enmeshed with state politics. In 2004, Lukoil partnered with ConocoPhillips (COP) in a deal that allowed Conoco to buy 20% of Lukoil in exchange for its pledge to advocate for Lukoil’s prewar claim to a large Iraqi oil field. On June 3, 2009, Lukoil announced that its 71% drop in first quarter profit still represented a turnaround from fourth-quarter 2008 losses. Both Gazprom and Lukoil reported profits for the first quarter of 2009, due to a combination of higher crude oil prices, lower tax rates and a weaker currency.

While U.S. investors are often keenly aware of the many challenges that their native economy faces, they are less aware of the complex challenges that foreign investors face in emerging markets. In Russia, the AK-47 as negotiating tool has been replaced by the lawyer, as complex legal schemes have tied up investments. Russian “raiders,” dissident share-holders who pressure Russian companies to bend to their will, acquire minority stakes only to file frivolous lawsuits against the companies. While the emerging Russian market has made strides toward modernization, a recent study by the Wharton business school suggests that the Russian legal system may not be advanced enough to handle the influx of corporate raiders.

The short-term outlook for Russia is strong, but this emerging market will face long-term challenges over the next 10-15 years. Russia’s population is shrinking at an alarming speed, and alternative energy solutions will challenge the primacy of oil as an energy source. In the short term, large multinational companies are betting on continued growth in Russia: Wal-Mart (WMT) recently announced that it sees “huge potential” for Russia in the future. For those wishing to catch the upswing and willing to monitor policies and commodity prices in the interim, RSX may still be a strong investment with room to run.

Comments

[Connie Derrick:]

Great explanation of this ETF

Jun 11 03:50 PM

[carey_jim:]

It has the look of an amateur day trading tool to me.

It's clear from the chart that it's buy and hold potential is dismal, unless you have an iron gut.

Jun 11 04:15 PM

[IronCity:]

Sorry, I have a concern: Are the ETNs and ETFs really sure? Can you lose money if the issuer fails? Is there any case of failure?
Thanks.

Jun 11 04:44 PM

[RiskReturnO...:]

Watch out for RSX if crude oil stops going up ... EWZ has more non-oil exposure, but both are tightly correlated to FXI. (You need growth in China anyway to support higher crude prices).

Jun 11 05:09 PM

[Alex F.:]

The ETFs are safe as they are actual fund structures where the assets are held by a custodian. The ETNs, on the other hand, are not safe as they are essentially debt instruments hence they carry credit risk of the issuer.


On Jun 11 04:44 PM IronCity wrote:

> Sorry, I have a concern: Are the ETNs and ETFs really sure? Can you
> lose money if the issuer fails? Is there any case of failure?
> Thanks.

Jun 12 03:58 AM

[Drew Arnold:]

At this point RSX is seemingly running up in in response to the run up in the price of oil. If you like the long-term prospects of RSX, then it might pay off to wait for a correction in oil to get into RSX for a little less.

Jun 15 04:24 PM