Russia Rebound Gains Legitimacy

The VanEck Vectors Russia ETF RSX, the largest US-listed Russia exchange traded fund, has been severely lagging broader emerging markets benchmarks this year, but some economic data points suggest Russia stocks can extend a recent recovery.

Accounting for a modest gain on Wednesday, RSX is up 5.5 percent year-to-date, well behind the more than 32 percent returned by the widely followed MSCI Emerging Markets Index. Russia accounts for 3.3 percent of the emerging markets benchmark, making it the seventh-largest country weight in that index.

RSX is higher by 2 percent over the past month and more than 13 percent since the start of the third quarter. That's a solid recovery for the bellwether Russia ETF, which has been stymied this year by slumping oil prices. Russia is the largest oil producer that's not a member of the Organization of Petroleum Exporting Countries.

Ongoing Economic Recovery

Russia's most recent recession was its worst in the post-Soviet Union era, but the recovery is gaining momentum, thanks in part to an accomodative central bank.

“As the Russian economy continues to recover from recession, solid growth in the manufacturing and service sectors point to the emergence of stronger demand,” Markit said in a note out Wednesday. “Relatively muted inflation and falling interest rates, however, may be themes that continue throughout 2017.”

The $2.2 billion RSX reflects Russia's status as a major energy producer as the ETF allocates 38.5 percent of its weight to that sector. RSX allocates over 30 percent of its combined weight to the materials and financial services sector, levering the ETF to Russia's rebounding industrial and consumer data.

“Although domestic demand has started to recover from the recent recession, consumer spending is rising from a low base,” said Markit. “Therefore, increased purchasing is not adding significant pressure to inflation. The Manufacturing PMI Input Prices Index signalled an accelerated pace of cost inflation in September average - partly explained by higher oil and energy prices - but it was below the series average.”

Leveraged Ideas

Risk-tolerant traders looking to profit from short-term upside in Russian stocks can consider the Direxion Daily Russia Bull 3X Shares RUSL. RUSL attempts to deliver triple the daily returns of the same index RSX tracks.

Traders that have doubts regarding more gains for Russian equities can consider the Direxion Daily Russia Bear 3X Shares RUSS, which looks to deliver triple the daily inverse returns of the MVIS Russia Index.

The cautionary tale is that leveraged ETFs on their own are volatile, but Russian stocks are more than volatile many other emerging markets, reminding traders RUSL and RUSS are best used over intraday periods.

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