Russia ETFs: Really Resilient

The Market Vector Russia ETF Trust RSX, the largest exchange-traded fund dedicated to Russian equities listed in New York, is one of this year's best-performing emerging markets single-country ETFs.

Up 19.2 percent on the year, RSX is sporting a gain that is nearly 50 percent better than that of the MSCI Emerging Markets Index. Of course, Russia's status as one of the largest oil producers in the world cuts both ways. Until recently, oil has been one of the commodity complex's brighter spots in 2016. Skeptics are apt to think oil's recent reentry into a bear market will test Russian equities and RSX.

Reviewing RSX

RSX reflects the Russian economy's dependence on energy commodities with a 39.7 percent weight to the energy sector. That is more than double the ETF's second-largest sector weight, which is materials at 17.5 percent.

However, there is more to the story with RSX and Russian stocks. Although the economy there is mired in its worst post-Soviet era recession, some data points suggest things are not as bad as previously believed regarding Russia's economy.

Russian Economic Environment

“The Russian economy may have contracted in the first quarter (1.2 percent growth year-on-year), but it was less than expected. During the same period, the economy benefited both from higher oil prices and a stabilization in the ruble's exchange rate. In June, stating steady inflation as a reason, the Bank of Russia lowered its key interest rate by 50 basis points to 10.5 percent,” said VanEck in a recent note.

To be sure, things are not perfectly sanguine in Russian equity markets or the local economy. For example, earlier this year, Moody's Investors Service put the country on review for a possible sovereign ratings downgrade.

However, Russia has an advantage many well-known investment destinations, developed or emerging markets, lack: a credible central bank.

“When it comes to consistency, you need to look no further than the Central Bank of Russia. Following the imposition of sanctions, the central bank continued to opt for a more orthodox policy response than was initially expected,” said VanEck. “This has allowed Russia's currency to act as a shock-absorber, and it has worked. The ruble sold off almost 75 percent in 2015 and inflation at the end of this year could be as low as 7 percent. Russia continues to pay its debts despite having its market access severely restricted under sanctions and as a result the government's external debt has approximately halved in the past two years (falling to $31.5 billion).”

Of course, Russian stocks are inexpensive, as is usually the case. At the end of the second quarter, the price-to-earnings ratio on RSX was more than 400 basis points below the comparable metric on the MSCI Emerging Markets Index.