For U.S investors, Russia can be a vexing market, fraught with both peril and potential. Like it or not, government corruption is usually an issue when investing in the emerging markets. That argument is valid when discussing China and India, but Russia almost certainly takes the corruption cake among the BRIC countries.
In addition, U.S. investors looking to tap into Russia's growth story don't have as nearly as many options when it comes to individual American depositary receipts. Think about it. You can probably name 10 Chinese stocks and four or five Brazilian stocks that trade here in the U.S. Naming three Russian companies listed in the U.S. is a more trying task.
However, there are 47 ETFs that offer exposure to Russia, but investors need to know what investing in Russia means. It has been said before, but I'll repeat it here: Buy a Russia-specific ETF such as the Market Vectors Russia ETF (NYSE: RSX), the largest and most liquid of the four Russia-specific funds, and you're essentially buying an oil ETF. You can take my word for it, but the chart below illustrates the point.
Sure, there are some divergences along the way, but at the end of the day, RSX and oil prices share an intimate correlation. That's no surprise. Oil and gas names account for 38% of RSX's weight. RSX's primary rival, the iShares MSCI Russia Capped Index Fund (NYSE: ERUS) goes even further with an almost 53% allocation to the energy patch. There you have it. Buy a large-cap Russia ETF and you're getting massive oil exposure, but where do investors turn if they want Russia exposure while dialing back on the oil theme?
I know it may seem like a wild thought in an environment that has suddenly turned risk-averse, but the one Russia-specific ETF that I'll be watching the most over the coming weeks and months is the newly minted Market Vectors Russia Small-Cap ETF (NYSE: RSXJ).
Sure, energy names account for nearly 18% of RSXJ's weight, but four other sectors, utilities, materials, industrials and consumer staples also receive double-digit weights. Put another way, if Goldman is right, and the bank often is, and Russia does outperform other emerging markets, doesn't it make sense to have the broadest possible exposure to the Russian economy? I know that's what I'm looking for in my ETF trades. Russia's a big country with enormous economic potential, but in this case, it may best to think small. Small-cap that is.
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