Amid reports that Russia is withdrawing troops from Ukraine, a move that could mark the beginning of the end of the months-long conflict between the two nations, investors are once again returning to exchange traded funds holding Russian stocks.
The Market Vectors Russia ETF (NYSEArca: RSX), the largest and most heavily traded Russia ETF listed in the U.S., has seen inflows of $183 million for the eight-day period ended Sept. 23, marking the largest inflows to the ETF since March when Russia invaded Ukraine, reports Halia Pavliva and Elena Popina for Bloomberg.
Although cash has been pouring into RSX, the ETF has slumped 5.4% since Sept. 5 while the rival iShares MSCI Russia Capped ETF (NYSEArca: ERUS) and SPDR S&P Russia ETF (NYSEArca: RBL) are off an average of 4.9% over the same period. [Rough Week for Russia ETFs]
On Wednesday, news outlets reported that NATO said Russia, which maintains it has played no role in supporting separatists in Ukraine, had begun pulling troops from Ukraine. However, Russia still maintains a large number of troops and weaponry along its border with Ukraine that could be rapidly deployed if cease-fire talks again stall.
RSX jumped 2.3% on heavy volume on those reports Wednesday, remembering investors of the sensitivity Russian stocks and ETFs have to any cease-fire talks, good or bad. Earlier this month, RSX and its rivals rallied after news agencies reported early Wednesday that Russian President Vladimir Putin and Ukrainian President Petro Poroshenko had been in talks about a cease-fire. [Cease-Fire Talks Lift Russia ETFs]
However, those talks fell apart, sending Russian stocks tumbling. Fragile peace talks underscore volatility in Russia ETFs that investors have become accustomed to over the years. The average three-year standard deviation on RSX and ERUS is about 30% compared to 19% on the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
Another source of allure for investors evaluating Russian stocks has been heard before: Rock-bottom valuations. Russia’s benchmark Micex Index “trades at 5 times estimated 12-month earnings, the cheapest in emerging markets,” according to Bloomberg.
Russian stocks have a historical tendency of trading at discounts to their emerging markets counterparts and over the past year have become deeply discounted to their own long-term track records. However, RSX has still fallen nearly 22% since the start of 2013. Earlier this year, Standard & Poor’s lowered Russia’s credit rating to BBB-, the lowest investment grade. [Russia ETFs Hold Some Cheap Stocks]
Market Vectors Russia ETF
Tom Lydon’s clients own shares of EEM.