New Russia ETF: Heavy On Metals, Mining, Energy

One year ago, the iShares MSCI Emerging Market Index Fund (EEM) was your one-stop shop for emerging market investors. Six months later, Claymore/BNY introduced the Claymore/BNY BRIC Index Fund (EEB) to capitalize on investor appetite for Brazil, Russia, India and China. Through today, EEB has outpaced EEM by 5% in 6 months time for a staggering 25% gain.

Today, there's a plethora of new arrivals. In late March, State Street Advisors sallied forth with the SPDR Emerging Market Middle East and Africa Index (GAF). It has picked up 10% off of the market lows, making the launch rather successful.

And yesterday, Van Eck Global has introduced the first single-country ETF for Russia, the Market Vectors-Russia ETF (RSX). The PR machine behind its introduction exclaims that it will seek to replicate the price and yield performance of the DAXglobal Russia+ Index -- a 30 stock index of publicly traded companies domiciled in Russia.

Breaking down RSX for our readers, there's a heavy sector focus on metals, mining, oil & gas as well as telecommunications. In fact nearly 50% of the new Russia ETF represents an investment in oil & gas.

In spite of the high allocation to oil and gas, the index that RSX seeks to replicate shows very little correlation with the price of crude oil. Further, the DAXglobal Russia+ Index has significantly outperformed the broader-based iShares MSCI Emerging Market Index Fund EEM; whereas EEM profited at an incredible 30% annualized, DaxGlobal Russia has annualized at roughly 40% for the last 5 years!

These kinds of returns beg the question, "How much longer can the emerging market bull last?" Russia enthusiasts see little downside by investing in the world's 9th largest economy and its exceptionally large trade surplus.

Typically, I favor regional exposure over single-country exposure. This is because many single-country ETFs have too much invested in a single company. Yet the Russia ETF does not have more than 10% in a single company... and that's favorable. (However, it does have 50% in one segment, oil & gas.)

Yet one who chooses the Claymore/BNY BRIC Index Fund EEB has only a fleeting 6% exposure to Russia; China, India and Brazil get 94% of that pie. It follows that, at this time, genuine exposure to Russia can best be achieved through a small allocation to the new Market Vectors-Russia ETF RSX.

Just pack an exceptionally high tolerance for risk, and a 10%-15% trailing stop-loss. If the world's hunger for "all things emerging" disappears or if the oil & gas sector takes a beating, this one could be trouble.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

Comments

[DavidJackson]

V interesting; thank you. Why is the BRIC ETF allocation to Russia so low?