New Russian ETF Comes With Risky Valuations

Successful new exchange-traded funds tend to have one of three characteristics. They either:

1) Are the first ETF in a particular asset class;

2) Focus on a “hot” area of the market; or

3) Offer significantly lower expenses than competing products.

The new Market Vectors-Russia ETF from Van Eck Global meets all three criteria, and will likely be a major hit with investors.

The fund, which listed today on the New York Stock Exchange [NYSE] under the ticker symbol RSX, is the first ETF to focus on Russia, one of the best performing markets over the past five years. With an expense ratio of 69 basis points, RSX is also significantly cheaper than other Russia mutual funds. The $1 billion ING Russia Fund [LETRX], for instance, charges 2.23 percent in expenses and levies a 5.75 percent load. In other words, a first-year investor in LETRX starts off 7.29 percent in the hole compared to RSX. (That calculation ignores commission costs for the ETF. A fairer comparison might add 20 basis points in expenses for a round-trip trade on a $10,000 investment, leaving LETRX investors just 7.09 percent behind.)

The new fund tracks the performance of the DAXglobal Russia+ Index, a modified market-cap weighted index of 30 publicly traded Russia stocks. The fund includes both American Depository Receipts and local Russia shares, and is dominated by energy exposure. In fact, RSX can be largely understood as an equity-based commodities play, as the fund is predominantly focused on commodity producing companies.

The index has a very low correlation against U.S. stocks, with a correlation of just 0.38 for the S&P 500 Index. In an era when low correlations are hard to find, that figure might be very appealing to investors.

That diversification benefit doesn’t come without a hitch, however: the Russian market looks pricey to many investors. The index trades at a P/E ratio of almost 24, compared to 23 for the iShares FTSE/Xinhau China 25 (FXI) and just 17 for the S&P 500. It’s also hugely expensive on a price/book ratio basis, with a p/b of 6.5 compared to 3.6 for FXI and just 2.7 for the S&P 500. The high values on the Russian index may scare off value investors. The index has delivered compound annual returns of 48 percent over the past five years, riding rising commodity prices and continued economic growth in Russia.

“As Russia continues to grow and mature, it will likely assume an increasingly important role in the global economy, and exposure to the country’s markets will be of growing interest to U.S. investors” said Jan van Eck, Principal at Van Eck Global. “As the first ETF listed in the U.S. to target Russia, we believe that RSX will appeal to anyone looking for a convenient means to access the market.”

Two hours into the trading day, RSX is already appealing to a lot of investors: the fund has already traded over 40,000 shares.

The prospectus is available here.

Comments

[David Jackson:]

Surprising that the overall valuation of the Russian stock market seems to assume so little political risk. My sense is that if there's a correction in the US market, emerging markets will take a real beating.

2007 May 01 03:17 AM

[jse17:]

Leeb's Complete Investor recommended RSX 06/01/2009. OK, I am on board!

Jun 03 02:50 PM