Seasoned emerging markets investors know at least three things about exchange traded funds tracking Russian equities, such as the Market Vectors Russia ETF (NYSEArca: RSX).
First, RSX and its rival ETFs have been tough trades from the long side, particularly applicable sentiment for the past two years when RSX has tumbled almost 23% while the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is off less than 1%. Second, Russian stocks are perennially inexpensive relative to the MSCI Emerging Markets Index.
Third, many investors seem to pay more attention to valuation than price action because despite disappointing by the only metric that really matters, that being price, money keeps flowing to Russia ETFs. Predictably, compelling valuations are driving those flows. [Russia ETFs Keep Getting Cash]
RSX’s shares outstanding count “has soared 59 percent since early August to 94.5 million, the highest level since April 2011,” report Elena Popina and Jackie Klauberg for Bloomberg.
RSX, the largest, oldest and most heavily traded Russia ETF, is now a $2 billion fund after tacking on $204.1 million in new assets just this month. RSX’s strong fourth-quarter inflows come after the ETF added nearly $520 million in new assets in the third quarter even as Western nation tightened economic sanctions against Russia and oil prices tumbled. Not even a bear market has kept investors from gobbling up shares of RSX.
RSX has posted 12 consecutive of inflows, according to Bloomberg and one money manager quoted by the news agency noted that buying in RSX could be a sign of bargain-hunting among hedge funds, though the ETF does not yet rank among the ETFs most owned by hedge funds. [Hedge Funds Love These ETFs]
Russia’s benchmark Micex Index “is now trading at the biggest discount to emerging-market equities since at least 2005,” according to Bloomberg.
The Micex currently trades at 4.7 times earnings as stocks ranging from OAO Gazprom to Lukoil and Mobile Telesystems, a combined 20% of RSX’s weight, trade at massive discounts to their average 10-year price-to-earnings ratios.
Although it has to yet to add (or lose) assets this quarter, the Market Vectors Russia Small-Cap ETF (NYSEArca: RSXJ) added $26.7 million of its nearly $69 million in assets under management during the third quarter.
Russian small-caps are also extremely inexpensive as highlighted by RSXJ’s end-of-third-quarter P/E ratio of 5.9 and price-to-book ratio of 0.9, according to Market Vectors data.
Market Vectors Russia ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.