Why Russia ETFs Are Receiving So Much Love

by: Gary Gordon

One of the reasons cited for the underperformance of several BRIC-related ETFs? Out-of-control inflation. Yet the data on rising consumer prices aren’t supportive of the simplistic analysis.

Consumer Price Data For BRIC Nations
% Rise Year-Over Year Expected 2011
China 4.9% 5.0%
Brazil 6.0% 6.0%
India 9.3% 7.4%
Russia 9.6% 9.1%

Inflation in Russia appears far more damaging than in other emerging market giants. And yet, investing in Russia has been hugely rewarding. In fact, Market Vectors Russia (NYSEARCA:RSX) hit a new multi-year high as recently as March 3, 2011, more than a week after the Libyan uprising.

On March 18, 2011, RSX rested a mere 4% off of its pinnacle. This occurred in spite of rampant selling of risk assets; it occurred with little regard to inflationary pressure; it even occurred in spite of enormous fears of a nuclear meltdown in Japan.

Meanwhile, WisdomTree India Earnings (NYSEARCA:EPI) has already fallen into bear market territory, currently down -21% from November 2010. At some point, iShares MSCI Brazil (NYSEARCA:EWZ) and SPDR S&P China (NYSEARCA:GXC) have found themselves down more than -10% from their respective peaks as well.

There are a number of Russia-related ETFs ... and they’ve also performed handsomely. Here’s a look at where some of those ETFs stand in relation to 52-week highs:

Approx % Below 52-Week
SPDR S&P Emerging Europe (NYSEARCA:GUR) -1.0%
SPDR S&P Russia (NYSEARCA:RBL) -3.4%
Market Vectors Russia (RSX) -4.0%
SPDR S&P Emerging Latin America (NYSEARCA:GML) -8.0%
SPDR S&P Emerging Asia (NYSEARCA:GMF) -11.4%

So what’s the deal with Russia - the king of Eastern Europe? For one thing, its economy is growing at a brisk 5%. And while estimates tend to peg 2011 closer to 4.5% growth, it remains one of the largest non-OPEC exporter of oil and gas. Roughly 40% of Market Vectors Russia (RSX) taps into Russian oil and gas corporations.

But that’s not all. Even Japan’s difficulties may benefit Russia. Not only will the country need to import 5 million barrels daily, but its infrastructure rebuilding projects will require enormous amount of iron ore/steel. This is the second largest sector in RSX, with a 17.5% weighting.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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