Russia ETF Climbs: Risky Energy Play
The rise of Market Vectors Russia ETF (RSX) has been swift, but the move is likely unsustainable, as this ETF is tied heavily to oil prices. As Exxon Mobil (XOM) and Chevron(CVX) advance in the U.S., Russia-based Lukoil (LKOD.LI) and OAO Gazprom (GAZP.RM) have helped to advance RSX more than 140% year to date.
RSX tracks 38 firms domiciled in Russia that have an average daily trading volume of at least $1 million and market cap of at least $150 million. The majority of components, more than 88%, are considered “large cap,” helping to contribute to the underlying liquidity of the fund. The expense ratio, 0.62%, is reasonable for a fund of this scope.
The driving force behind RSX’ performance has been the fund’s concentration in commodities. The top-weighted sector in the fund, comprising nearly 42% of assets, is oil. The second-largest sector represented is iron/steel, with 18.5%. Other top sectors include telecommunications, finance and energy, with 14%, 10.4% and 5.5% allocations, respectively.
A fall in global demand for oil and gas during the worst of the global economic recession caused Russia to dip more than expected. In 2008, the fund dropped more than 73% as oil prices fell. Aggressive rate cuts and surging oil demand have helped Russia recover in 2009, and RSX is up 98% for the one-year period ending Oct. 15.
RSX, like other cap-weighted emerging markets ETFs, reflects political and economic pressures inherent in these markets. More than 50% of iShares MSCI Brazil (EWZ) and 34% of WisdomTree India Earnings (EPI) are allocated toward energy and materials. When compiling a portfolio of liquid, emerging market companies, investors will often see energy and materials rise to the top.
This trend could be reversing as ETF issuers compete to launch small-cap emerging markets portfolios. The Market Vectors Brazil Small-Cap Index (BRF) is weighted toward consumer discretionary and financials, while Claymore/AlphaShares China Small-Cap Index ETF (HAO) is weighted toward industrials and information technology.
Emerging markets ETFs are a good way to diversify a broader portfolio, but investors should consider several key factors before adding RSX. Since the fund is essentially an energy play, it is important to examine existing energy exposure before doubling up. Because of the potential for volatility, this is a fund that should be bought and watched, not bought and forgotten.
The stark difference in RSX’ 2008 and 2009 performances should drive home the volatile nature of this fund. How long can the upswing continue? It will depend largely on global demand for oil, as the firms in this portfolio battle both internal and external pressures to deliver.
