How to play Russia ETFs

The iShares MSCI Russia Capped ETF (ticker ERUS) has expended its AUM by 40% year-to-date in 2017, from $USD 446M to $USD 624M, according to the fund flow tool. And two Russia ETFs’ (RSX and ERUS) prices increased more than 20% since the low of July 2017. What are the factors drove these moves? Or say it the other way, how do we play Russia ETFs? This is the main focus of this blog article today.

Four factors to be considered when invest in Russa ETFs: (1) the Russian stock market; (2) crude oil price; (3) currency exhange rate, Russian Ruble to US dollar; (4) the money flows trend towards emerging markets.

1, Fundamental: the Russian stock market itself

There are 2 major indices for the Russian stock market. The first one is MICEX index, the second one is the RTS index. Acctually they are tracking the same basket of 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the Moscow Exchange. Both are market-cap weighted. The main difference between 2 indices is, the MICEX is denominated in Russian Ruble, while the RTS index is denominated in US dollars.

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Source: Moscow Exchange

2, Crude oil price

The Russian stock market is dominated by engergy companies. From the chart below we can see, the market capitalization of energy sector is weighted almost 50%.

Screen Shot 2017-10-28 at 10.59.37 PM

So inevitably, the performance of the Russian stock market is highly correlated to the crude oil price. From the chart below, we can see the RTS index goes along with the Brent crude oil price.

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3, Currency exchang rate: Russian Ruble to US dollar

As Russia’s economy is resource based, especially crude oil, its currency is also highly correlated to crude oil price. From the chart below, we can see the almost perfect correlation between exchange rate and oil price.

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4, The overall money flow towards emerging markets

Russia is classified as one of the emerging markets by MSCI, a major index provider. In 2017 we saw significant money inflows to the emerging markets funds. Russian stock market benefited from this inflow.

country classification table

Source: MSCI


The bottem line: Among the 4 factors, oil price is definately the most influential factor. Frome the chart above (with 2 ETFs), we can see two Russia ETFs RSX and ERUS are both following the oil price trend. So to make our job easier, the simpliest way to play the Russia ETFs is to follow the crude oil trend.






Behavioural Economics Matters

This Wednesday I attended a Morningstar event about behavioural economics in downtown Toronto. It was quite fascinating and enlighting. Some personal takeaways as below.

1,  People are more IRRATIONAL than rational, not only in investing activity, but also in our daily life. The more we realize this, the higher chance we can save ourselves.

2, Don’t try to predict the markets. Don’t have strong bias before making investment decisions.

3, People + AI (or computer assisted system)= Enhanced people. Systems and rules are more reliable than people.

4, Behavioural coaching is part of financial advisor’s daily job.

I’ll pay more attention to behavioural economics topic afterwards. Read the “Nudge” first by this month.

Trade what you see, not what you think

Last Thursday, Oct 12 2017, I dumped 90% of my portfolio holdings and then bought some long term bonds(TLT) and gold(GLD). The only reason was I had a gut feeling that morning that some bad things will happen in the stock markets around the world.

I knew it was emotional and irrational, but I can’t hold the impulsiveness to do it. At that moment, I was controlled by fear, or a kind of biased prediction. After I’ve done that, my feelings were mixed. At one side, I felt relieved because I am in a defensive position now. At the other side, I feel shameful and guilty, as what I did was like a 100% retail player. It didn’t match all the education and training I’ve got through the years.

I spent a lot of time to build my portfolio, which was dumped eventually in less than 30 minutes. The portfolio is well divesified, with core and satellites, performed very well. It was a produce of rational work, but destroyed by irrational emotion.

Today I listend a podcast called “trade what you see, not not what you think”. Suddenly I realized what is the problem I have.

Before I did the irrational thing, I read quite a few berish call articles on the internet, such as a recent memo from Howard Marks, “There they go again …again”. With the stock markets around the world are hovering the high level, more and more calls about bubble, collapse, etc. I am biased by those calls, or predictions. I just THINK the market is in jepardy.

Actually, when I SEE the charts, which I do it on the daily basis, my holdings are still in bullish trend, or at least in a consolidation range but with breakout potential.

I chose to ignore what I see but to belive waht I think.

Some takeaways from this important lesson:

1, Predition vs. reaction. Prediction is hard and notoriously unreliable. But we can choose to react to the price movement. Those are happened facts.

2, Analyst vs. investor/trader. Analyst has to make calls all the time, they have to have an opionion at any time, that is there job. They can’t say I don’t know. As an investor or a trader, we can say I don’t know at most of the time. We stalk, wait and see, catch a few high probability trades.

3, Don’t over thinking or over trading. As an individual investor, my most precious asset is my time. I cannot catch all the information flow in the market. I shouldn’t watch news too often. I should spend more time on reading books, doing sports, and writing.

4, Try to be objective and emotionless. Always have some doubts when reading or listening to someone else’s opinions.

5, Investing and trading based on a preset system, a set of rules, checklists. Those are repeatable.