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.

Screen Shot 2017-10-28 at 10.52.44 PM

Screen Shot 2017-10-28 at 10.53.05 PM

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.

Screen Shot 2017-10-28 at 9.03.17 AM

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.

Screen Shot 2017-10-28 at 11.25.32 PM


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.






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