Is Russia now a buying opportunity or a value trap? An analysis of fund flows for RSX, the largest Russia ETF, shows some interesting results. RSX was down 17% during Q1 ‘14, yet assets in RSX grew by 15% during the quarter.

We used the First Bridge ETF data set to analyze this further and we see the following trend in daily ETF new flows. Net flows refer to new creations or redemptions in the ETF i.e.

Daily Net Flows = Daily Change in ETF Assets – Daily Change due to market movements

As we can see, after the first trading day in March, there was not a single day in the month where RSX had a negative new flow.  While it is clear that creations have increased significantly in March, identifying precisely what is causing it is more complicated. One possibility is that value investors who believe that the Russian market is now under-valued have moved into the ETF. Another is that new share creation has been driven by short selling activity – either to cover short positions or by asset managers who want to hedge their existing exposure to Russian stocks. This is certainly likely to be a factor, since short sales are now up to 25% of the total shares outstanding of RSX. A combination of both these factors is the most plausible explanation.

The chart below adds more detail by showing cumulative losses and net flows during the quarter. The blue represents the cumulative change in RSX assets due to market movements. The red represents the cumulative change in RSX assets due to net new fund flows.

By the end of the first quarter of 2014, market declines caused a cumulative loss of $154M in assets in RSX. However there were net new inflows of $335M, resulting in RSX gaining $181M (i.e. 335 – 154) in assets for the quarter. Fund flow patterns over the next month will likely shed more light on whether these new share creations are driven by longer term value investors, which is ‘stickier’ than speculative activity.