The same song keeps repeating with exchange traded funds holding Russian stocks, but it is not a pleasant one for investors.
The Market Vectors Russia ETF (NYSEArca: RSX) fell almost 3.6% Thursday, touching a new 52-week low in the process. However, RSX, the largest and most heavily traded Russia ETF, was joined in the new club by the Market Vectors Russia Small-Cap ETF (NYSEArca: RSXJ), SPDR S&P Russia ETF (NYSEArca: RBL) and the Direxion Daily Russia Bull 3x Shares (NYSEArca: RUSL). The iShares MSCI Russia Capped ETF (NYSEArca: ERUS) is just pennies away from joining the new 52-week low group, too.
Falling oil prices are having a crippling effect on energy-heavy Russia ETFs. Russia, one of the largest non-OPEC producers in the world, benchmarks to the Brent contract, bad news as theUnited States Brent Oil Fund (NYSEArca: BNO) has tumbled 27.1% over the past three months. Even that is not keeping investors from putting new money to work with Russia ETFs.
Since the start of this month, RSX has seen $239.3 million of inflows, keeping its torrid asset-gathering pace alive. That while falling 5.6%. [Broken Record for Russia ETFs]
There are obvious and significant headwinds to near-term upside for Russia ETFs because at least one key component of the bull case for these funds is incurring damage: Dividends. Russia is one of the largest dividend-paying countries in the emerging world. Tepid, or worse yet, no dividend increases from Russian firms represent a blow to President Vladimir Putin’s bid to force Russia’s highly profitable firms to pay out at least 25% of net income in the form of dividends in an effort to stoke foreign investment in the country. [Russia Tries to be a Dividend Player]
Amid tumbling oil prices and crimped profitability due to Western sanctions, analysts are projecting a murky near-term outlook for Russian dividends, particularly from the energy sector.
Markit expects Russian energy names to pare dividends by 6% while forecasting a 14% drop in payouts by the country’s financial services firms. Those sectors combine for 55.5% of RSX’s weight. Markit said it expects that the only major Russian companies affected by Western sanctions that will boost payouts next year are Lukoil and Novatek. Those firms combine for nearly 14% of RSX’s weight. [Sanction Cripple Russian Dividends]
On Thursday, OAO Gazprom and OAO Rosnet, Russia’s two largest oil companies, slid to five year lows after JPMorgan Chase pared its rating on the stocks, citing troubling dividend forecasts, reports Halia Pavliva for Bloomberg.
Rosneft’s 2015 payout could dip 18% and at least one research firm is forecasting a 44% drop for Gazprom’s 2015 dividend, according to Bloomberg.
RSX allocates a combined 12.4% of its weight to Gazprom and Rosneft. The ETF sports a 30-day SEC yield of 3.52%, 155 basis points above the comparable yield on the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
Market Vectors Russia ETF
Tom Lydon’s clients own shares of EEM.