Russia ETFs Could be Post-Conflict Buys

There are a few certainties regarding Russia exchange traded funds this year. First, Russian stocks and the ETFs those stocks call home are inexpensive.

Not just inexpensive compared to the broader emerging markets space, which is usually the case with Russian equities, but deeply discounted compared to long-term P/E ratios for Russian equities. [Russia ETFs Hold Cheap Stocks]

Second, Russia ETFs have been in the spotlight, and not in a favorable way, due to the country’s ongoing conflict with Ukraine. That has been a drag on funds such as the Market Vectors Russia ETF (NYSEArca: RSX). RSX, the largest Russia ETF, is joined by the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) and the SPDR S&P Russia ETF (NYSEArca: RBL) in the double-digit year-to-date loss club and all three ETFs rank among the worst non-leveraged ETFs this year.

Those slack performances do not mean there is not post-conflict opportunity with Russian stocks and the aforementioned ETFs. In fact, history shows Russian stocks can rally following the country’s geopolitical spats.

“Recent events in Crimea and eastern Ukraine raise questions about financial risk management as well as urgent political, military, and humanitarian issues. How has the riskiness of the Russian stock market changed? What can investors expect when Russia—or, for that matter, any other country—appears to be on the verge of armed hostilities? The Russian market, as represented by the MICEX index, has posted a total return of -11.3% since the crisis broke out on February 26th. Where will it go from here?,” write Philip Lawton and Noah Beck in a new note from Research Affiliates.

Research Affiliates studied the performance of various global markets in the wake of six-modern day conflicts, including the Russian market’s response to the beginning of the Second Chechen War in 1999 and its response to the Russo–Georgian war in 2008.

“It is impossible to predict the outcome of an historical situation as complex and fraught as the Ukrainian crisis, but examining other modern conflicts might at least help in sizing up the market risk. Our research suggests that, when regionally contained wars break out, the negative impact is sharp but relatively short-lived. However, we also learned that the effect on portfolio returns depends in part on the investment strategy,” according to Research Affiliates.