Russian ETFs Are Flying High, Thanks to Smart Central Banking

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September 21, 2016 10:41am NYSE:RSX NYSE:RSXJ

A few months ago while attending an economic conference in New York, I heard one speaker say that there were only two smart central bankers in the world: Raghuram Rajan in India and Elvira Nabiullina of Russia.

Since then, Dr. Rajan has stepped down, so I am going to assume that there is now only one smart central banker left in the world.

According to an article in the August 23 edition of the Wall Street Journal titled, “The Woman Who Revived Russia’s Markets,” the authors Carolyn Cui and Andrey Ostroukh laid out their thesis about why the central banker is credited with steering the country successfully through a deep recession, brought on by $40 oil, western sanctions, and the sharp drop in the value of the Ruble.

Since officially taking the reins of the Russian central bank in 2013, Nabiullina has taken aggressive action, which included hiking interest rates, and allowing the Ruble to float freely, which has in turn held down inflation. According to the central bank, these measures have led to a drop in the inflation rate as of September 12 to 6.6% year-over-year, and they expect that number to keep falling until it reaches their target of 4% by the end of 2017.

As a result, rates were cut by 50 basis points to 10% on September 16, but there is no expectation of other rate cuts until late 2017. The aggressive actions by the central bank have created stability in the equity markets — and foreign investors have entered in droves. The MICEX is up over 12% YTD and the popular VanEck Vectors Russia ETF (NYSE:RSX) has a positive return of 25%.

However, in my opinion, two other ETFs are better investments, and they are Direxion Daily Russia Bull 3x Shares (NYSE:RUSL) (up 48% YTD) and VanEck Vectors Russia Small-Cap (NYSE:RSXJ), which is up a positive 58% YTD. Both of these ETFs should only be considered by highly risk-tolerant investors, as the former is a leveraged fund and the second invests in small caps.

Now what’s interesting is that one of the components of RSXJ is the national airline Aeroflot (AFLT:RM), which has a one-year return of over 209%. That’s staggering, and brings back old memories for me of the Aeroflot flights out of Heathrow, which were the loudest — especially the Ilyushin IL-62, which by all accounts was Soviet bomber converted into a passenger aircraft. However, as a passenger, when you wished people goodbye, you really meant it, because their safety record way back then was awful. I am glad they now fly Boeings and Airbuses, so I am sure that their safety record has improved greatly.

Now even I would fly that airline, and better yet, invest in that stock — and the country of Russia as a whole.

About the Author: Peter Kohli

peter-kohliPeter Kohli is President of DMS Advisors where he is involved in investment research, and in particular the developing markets. He also writes a blog for the Nasdaq website and for Frontera News. Before that, he was CEO/CIO of DMS Funds. As such, he managed the Firm’s operations, including index selection and fund development, and was actively involved in all of DMS Funds’ business development efforts. Earlier, Peter held a variety of financial services-related positions, including a financial planner. Peter holds a Chartered Financial Consultant (ChFC) designation from The American College (Bryn Mawr, PA) and a BA in Mathematics from The Open University (Milton Keynes, England).

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