A Russian Recovery: Small-Cap ETF Ideas in Emerging Markets

Investors looking to diversify overseas may want to consider Russian small-cap markets. One fund with this theme is the VanEck Vectors Russia Small-Cap ETF (RSXJ).

The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Russia Small-Cap Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes securities of Russian small-capitalization companies. It will normally invest at least 80% of its total assets in securities of small-capitalization Russian companies.

Summarily, RSXJ gives investors:

  • Small-Cap Focus: Small-caps may offer greater exposure to domestic growth, less exposure to global cyclicals.
  • Value Opportunity: Russia’s equity market is currently offering deep discounts when compared to other emerging markets.
  • A Pure Play: Fund companies must be incorporated in or derive at least 50% of total revenues from Russia to be added to the index.

RSXJ Chart

Like all global economies, Russia has had its challenges with the pandemic, but there are already signs of improvement.

“Russia’s economy declined by 3.6% year on year in the third quarter of 2020, marking a notable improvement after an 8% fall in GDP seen in the second quarter,” a Moscow Times report noted. “Better GDP dynamics in the third quarter will be welcomed, as the risks associated with the second wave of the coronavirus had started to call Russia’s Economy Ministry’s forecast of a 3.8% contraction for the year into question. The data came in line with the consensus forecast, but was better than the official expectations, BCS Global Markets said.”

“Following the release of third quarter growth data, the GDP decline in 2020 could now be even smaller than our -3.8% forecast, which is a positive,” the company said. Analysts believe that this reflects the stress-resistant structure of the economy as well as an efficient, albeit modest, government response to the crisis.

Historical data shows that while small-caps could get hit the hardest during downturn, they have the ability to outdo their large-cap brethren when times are improving.

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