Russia ETFs Reward, but Caution is Required

Previously moribund Russian stocks and the corresponding U.S.-listed exchange traded funds (ETFs) have been among this year’s most pleasant surprises in what has been a broad emerging markets rally. For example, the VanEck Vectors Russia ETF (NYSEArca: RSX) and the iShares MSCI Russia Capped Index Fund (NYSEArca: ERUS) are up an average of nearly 28% over the past three months.

Recent price action in RSX is encouraging, particularly when considering market observers widely expect Russia’s worst post-Soviet era recession to extend throughout this year. Onlookers remain cautious over the market outlook. While President Vladimir Putin and other Russian politicians argue that the worst is over, the economy is expected to remain in a recession for the year. Russia’s GDP is expected to contract again this year, extending what is becoming a lengthy recession.

RSX is the largest and most heavily traded of the Russia ETFs listed in the U.S. Following a sharp advance on the back of rebounding Brent crowd prices, Russian stocks are still inexpensive relative to broader emerging markets indexes, but some market observers advise caution.

“The case for Russia rests on its stoic endurance in the face of the global oil crash and Western sanctions, which have cramped credit availability. Unlike the leaders of some other one-trick-pony oil exporters, Putin & Co. haven’t drained the nation’s reserves to maintain its living standards. Instead, they’ve let the population suffer, with a ruble that has lost more than half of its value since mid-2014, while a hawkish central bank has made savvy bond investors a fortune,” reports Craig Mellow for Barron’s.