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
About half of RSX’s top 10 holdings, a group combining for almost two-thirds of the fund’s weight, hail from the energy sector.
“Fitch-rated Russian oil and gas majors’ performances in 1H17 benefited from a 33% increase in the Urals oil price, which compensated for a stronger rouble,” adds Fitch. “However, we expect FCF generation to vary materially among those issuers in 2017 as a result of differing tax treatments and investment stages. While the tax burden as a percentage of oil price remained relatively stable for most players, Gazprom was subject to higher mineral extraction tax (MET) rates on its gas operations. We view the threat of further tax hikes as limited unless oil prices stay at or below USD40/bbl for an extended period of time, which is not our base case.”
Alternatives to RSX, also the most heavily traded Russia ETF, include the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) and the VanEck Vectors Russia Small-Cap ETF (NYSEArca: RSXJ).
Aggressive, risk-tolerant traders can consider the Direxion Daily Russia Bull 3x Shares (NYSE: RUSL), which attempts to deliver triple the daily returns of the same index tracked by RSX. The Direxion Daily Russia Bear 3x Shares (NYSEArca: RUSS) looks to deliver triple the daily inverse returns of that index on a daily basis.
For more news on Russia ETFs, visit our Russia category.