Russian Rebound: Russia ETFs Surge in May

April showers have resulted in May flowers (and inflows) for exchange traded funds tracking Russian equities. Translation: After slumping last month, Russia ETFs have surged this month,

Last month, the Market Vectors Russia ETF (NYSEArca: RSX) and the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) fell an average of 6.4% as investors passed on Russian equities despite valuations that remain among the lowest in the developing world. [Ukraine Saga Plagues Russia ETFs]

Since the start of May, RSX and ERUS, the two largest Russia ETFs, are up an average of 14.4%, more than triple the 4.3% returned by the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) over the same time. The S&P 500 is up just 1.1% this month.

More gains could be on the way for Russian stocks and ETFs. On Monday, Russian bonds and equities soared after Petro Poroshenko won Ukraine’s presidential election. News of Poroshenko’s victory is stoking speculation the months long standoff between Russia and Ukraine, which hampered Russian stocks, could soon end in somewhat amicable fashion.

A potential rebound in Russian bonds is pivotal to the fortunes of the country’s stocks, especially after Standard & Poor’s last month lowered Russia’s sovereign credit rating to BBB-, the lowest investment grade. [Russia ETFs Slide After S&P Downgrade]

Some market observers have pointed to opportunity with Russian debt, noting the country’s bonds could be a value play due to yields that recently were well in excess of Brazil’s, a country with the same credit rating.

The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) is among the emerging markets bond ETFs with sizable Russia allocations while the ProShares Short Term USD Emerging Market Bond ETF (BATS: EMSH) could be an even better idea due to a combined 19% weight to Russia and Ukraine. [Russia Bond ETFs]

RSX and ERUS are not alone in the May Russia ETF rally. The SPDR S&P Russia ETF (NYSEArca: RBL) is up 14% this month, indicating the ETF is benefiting from its sizable exposure to state-run companies, including a combined 30.5% weight to energy behemoths Gazprom and Lukoil.

RBL is reflective of two positive traits of Russian equities: Deeply discounted valuations and the country’s growing dividend footprint. The ETF sports a P/E ratio of just 5.9 and a dividend yields of almost 3.2%, according to State Street data.

Investors have not shied away from allocating new capital to Russia ETFs this month as RSX has added $114.7 million in new assets while ERUS has gained $51.6 million. RSX added just $18.3 million last month while ERUS bled $38 million.