ETF Trends
ETF Trends

Thanks in significant part to rebounding oil prices, the VanEck Vectors Russia ETF (NYSEArca: RSX) and the iShares MSCI Russia Capped Index Fund (NYSEArca: ERUS) are among the best-performing single-country emerging markets exchange traded funds (ETFs) this year.

With the oil factor in mind and the energy sectors overweight position in ETFs like RSX and ERUS, it might be logical to think that the more oil prices rally, the more investors would favor Russian stocks. However, Russia is one of the more volatile emerging markets so some investors might need some extra prodding to get involved with ETFs such as ERUS and RSX. Some of that convincing may have arrived Thursday.

Related: Russia ETFs Reward, but Caution is Required

“Investors appear to have ignored the fact that Russian equities have moved into a virtuous circle with inflation rates rolling over, current account surpluses improving alongside rising FX reserves. Moreover, on the ground, economic indicators are either bottoming out or have turned from negative to positive. Even though oil prices are far from their 2014-15 highs, the authorities have kept a very disciplined monetary and fiscal policy to ensure that inflation has remained tempered while fears over a devaluation of the currency have proved groundless,” according to a Jefferies noted posted by Dimitra DeFotis of Barron’s.

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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.

Investors could also be lured back to RSX and Russian stocks due to some of the emerging world’s cheapest valuations. RSX is home to some of the emerging world’s least expensive stocks. The largest Russia ETF trading in the ETF allocates over 37% of its weight to energy stocks, by far its biggest sector weight.

Related: Time to Consider This Emerging Market

“While economic data points all seem to be improving, equity market indicators are also suggesting that the worst is over. Market breadth is widening while the performance of financials is closely tied to the growth in FX reserves. However, investors have failed to significantly raise their weightings within the equity market due to poor sentiment and geopolitics,” adds Jefferies in the note posted by Barron’s.

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VanEck Vectors Russia ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.