Cheap Stocks Provide Fool's Gold for Bettors on Bullish Leveraged Russia ETF

Some emerging markets investors undoubtedly cringe at the phrase “Russian stocks are cheap.” Not because it is inaccurate. Actually, Russian equities usually traded at discounts to broader emerging markets benchmarks and those discounts have widened in recent years.

Rather, the cringing comes about because the “Russian stocks are cheap” chorus has not been quiet but the advice has born no fruit. Over the past three years, the Vanguard FTSE Emerging Markets ETF VWO and the iShares MSCI Emerging Markets ETF are off an average of 12.5 percent while the Market Vectors Russia ETF RSX has slid 41.1 percent over that period.

That is in the past seems to be the attitude some traders are taking toward the Direxion Daily Russia Bull 3x Shares RUSL, an ETF that seeks to deliver three times the daily returns of the Market Vectors Russia Index, RSX's underlying benchmark.

Since April RUSL's shares outstanding tally has increased 84 percent have added more than $37 million to the fund in July and August following June inflows of $68 million, according to Bloomberg. 

Said another way, the old expression about good money going after bad is being played out in real time with RUSL. Sure, RUSL has had its moments in the sun. There was the April 1 to April 15 rally that saw the leveraged bull Russia ETF surge more than 50 percent. And from April 27 to May 15, RUSL climbed almost 21 percent, but since May 15, RUSL has lost more than two thirds of its value.

As Benzinga reported last Friday (similar data were highlighted by Bloomberg), RUSL's bearish counterpart, the Direxion Daily Russia Bear 3x Shares RUSS, has been losing assets. No need to do a double take because the unfortunate reality is, as we have noted in recent examinations of pairs of leveraged ETFs, traders have a tendency to pour into the worst-performing of a pair of leveraged ETFs hoping for a rebound while exiting the fund that is actually performing well. 

That is the state of affairs with RUSL and RUSS. RUSS “is on track for a fourth month of consecutive outflows and its assets are almost flat since the beginning of the year,” reports Bloomberg.

All RUS has done since May 15 is surge 114.1 percent. Alright, give some of these RUSL supporters a break. Russia's MICEX trades at half the price-to-earnings ratio of the MSCI Emerging Markets Index while RSX, the largest Russia ETF trading in the U.S., has trailing 12-month P/E of 5.66, according to Market Vectors data, also about half that of the emerging markets benchmark. 

RSX is modestly higher year-to-date, but if the current trend continues and it shows little sign of abating, the ETF will finish 2015 in the red, marking the fourth time in the past five years it has done so.