Why Russia ETFs Are Not A Debt Crisis Safe Haven (RSX, VGK, USO, RSXJ, RBL, ERUS)
Eric Dutram: As the European debt crisis has intensified in recent weeks and months, many investors have sought to exit the common currency bloc for other European nations that do not use the euro. Generally speaking, this has resulted in many investors looking to nations such as the UK, Switzerland, and a few Scandinavian nations as well.
Beyond these choices, however, a few intrepid investors have chosen to look east to the large market of Russia instead. The country has some appeal due to its relatively small public debt, strong trade balance, and little banking exposure to the European disaster (see How To Play The Spain ETF).
In fact, this is likely a key reason for why the country may have seen some interest from European focused investors as of late. After all, many of the Scandinavian, British, and Swiss firms that dominate their respective national ETFs have much higher levels of euro zone banking exposure than their Russia ETF counterparts.
Furthermore, many of Russia’s key export partners are either strong euro zone countries—such as the Netherlands and Germany—or nations outside the euro zone such as Turkey, China, and the Ukraine. This suggests that an austerity slowdown isn’t likely to impact Russian businesses as much as many of its European counterparts, suggesting that it could be a better play in the region.
However, despite all these positives for the Russian economy, the country’s markets have sunk as much or even more than many of the PIIGS markets over the past few weeks and months. Unfortunately, the strong points of the Russian economy appear to be no match for the weakness in one key aspect of the global economic picture; oil (read Play An Oil Bull With These Three Emerging Market ETFs).
Russia is practically tied with Saudi Arabia in terms of oil production and is also the second biggest exporter of the product as well. Given this, and the heavily concentrated nature of the Russian economy, the key commodity tends to be the main driver of the fortunes in the nation.
While this can be a great thing when oil markets are surging higher, it can also have the opposite effect when crude prices are tumbling. In fact, over the past six months, the main Russia ETF has slumped along with crude oil and has easily underperformed broad European markets as well.
Besides a recent surge thanks to stimulus hopes, the top Russia ETF (NYSEARCA:RSX), has lost about as much as (NYSEARCA:USO) a popular oil benchmark has in the same time frame, with both tumbling by more than 11%. Meanwhile, broad European markets, as represented by(NYSEARCA:VGK), have fallen by about a third as much as their Russian counterparts over the past six months, suggesting that while there are a few exceptions to the rule, a broad play on Europe still would have been a better idea than investing in Russia over the past six months and especially in the past six weeks.
This has also been particularly the case for the Russian small cap market, as represented by the Market Vectors Russia Small Cap ETF (NYSEARCA:RSXJ). Over the past six months, this fund has lost over 16%, putting it close to the losses that some of the highly indebted PIIGS members have suffered in the same time frame (see Is Now The Time To Buy Russia ETFs?).
Yet, with this being said, investors should note that some of the less popular Russia ETFs—such as (NYSEARCA:RBL) and (NYSEARCA:ERUS) —managed to lose a bit less in the time period, respectively, 9.1% and 7.1%. Part of this is likely due to the focus of these products on oil and gas integrated firms while RSX has a greater tilt towards materials and riskier oil exploration firms, while RSXJ feels the full brunt of political risk and is already volatile due to its small cap nature (seeTime To Consider The Small Cap Oil ETF).
Russia Is Not A Safe Place To Be
No matter how investors have played Russia ETFs over the past few months, the results have been a nightmare. Clearly, the country has not offered up much of a safe haven when compared to its Western counterparts, despite its relative lack of exposure to the epicenter of the crisis.
Instead, it appears as though the broad weakness in oil markets has driven the Russian market lower, exposing just how dependent on high oil prices the Russian economy still is. Undoubtedly, the Russian market is one that should only be played in an oil bull scenario, as this is still the chief driver of the country despite attempts at diversification (see more on ETFs at the Zacks ETF Center).
All of the ETFs tracking the country reflect this to a varying degree and need to be approached with caution when oil prices are either flat, or especially when they are sliding. While Russia may be an interesting pick for those seeking exposure beyond the euro zone, recent events show that it doesn’t offer much of a safe haven and instead has been pretty much the opposite over the past three month period.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.