The Russian stock market is geared for a transformation after recent changes to legislation has allowed the introduction of exchange traded funds. The move should help bolster liquidity in the local market and allow more foreign investment to flow into the country.

“The amendments to the law came into effect at the start of September, so the market has not yet had enough time to respond to the changes. It remains to be seen what exact form these new vehicles will take, but local analysts expect the development to give a boost to the local market,” Anna Fedorova wrote for Investment Europe.

The change comes about as the Market Vectors Russia ETF (NYSEArca: RSX) has become attractive based on valuations. The $1.75 billion ETF that trades on U.S. exchanges is currently trading at a 32% discount, reports Benzinga. This is the biggest discount since August, according to Bloomberg data. As of September 30, RSX had a price-to-earnings ratio of 6.54 and a price-to-book ratio of 0.88, according to Market Vectors data. RSX is the largest and oldest pure play ETF tracking the Russian stock market. [ETF Performance: A Selective Approach to Emerging Markets]

Another example is the iShares MSCI Russia Capped Index Fund (NYSEArca: ERUS) which has a P/E ratio of 8.4 and a price-to-book ratio of almost 2.6. Analysts say that the discount for Russian equities is huge, but it may not be enough to grab the attention of investors. However, the long term picture for emerging market stocks and ETFs does support a growth story. [Options Traders Bearish on Russian ETFs]

The inclusion of ETFs within Russian markets will help boost liquidity. The transparency and ease of trade will allow Russian investors to respond to the market conditions in ways they could not with mutual funds.

“ETF providers will be able to target a much wider audience than just local investors. According to the new legislation, Russian ETFs can be traded on foreign stock exchanges, subject to the local rules of each exchange. Thus, the new product will give foreign allocators better access to the local market,” Fedorova said. [5 Global ETFs to Watch]

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