The VanEck Vectors Russia ETF (NYSEArca: RSX), the largest Russia ETF trading in the U.S., is up just 3% YTD, well behind the MSCI Emerging Markets Index.
However, Russian stocks have recently been rebounding. For its part, RSX is up nearly 8% over just the past month and there could be more upside to come with Russia ETFs.
More important to Russian stocks than the sanctions could be oil prices because Russia is the world’s largest non-OPEC producer. While Russian stocks historically trade at discounts relative to international benchmarks, the ruble is currently one of the cheapest emerging markets currencies.
“Russian oil and gas majors’ 1H17 results highlight their varying positions in the investment cycle and sensitivity to taxation, which will be key drivers of free cash flow (FCF) in the near term, Fitch Ratings says. “Along with dividend distributions, these factors are likely to weigh on FCF generation at Gazprom and Gazprom Neft (GPN). In contrast, we forecast robust FCF generation for Novatek and to a lesser extent Lukoil, as both companies have passed the peak of their expansionary capex phases.”
Russia’s equity markets are intimately linked to the fortunes of oil as many of the largest companies there are energy producers. That fact is reflected in RSX and rival large-cap Russia ETFs. RSX allocates 36.7% of its weight to the energy sector, nearly 50% more than it devotes to financial services, its second-largest sector weight.
Related: 5 Russia ETFs Looking to Rebound