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 etf.com 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 http://www.moex.com/

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%.

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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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Source: tradingview.com

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 https://www.msci.com/market-cap-weighted-indexes

 

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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Invest in specific country/territory: Bermuda as an example

Last week I took a short visit to Bermuda, a beautiful tiny island in the Atlantic Ocean. The experience was quite impressive.

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Photo by Kai Cheng, Jan 11, 2016 at Bermuda

Althout this British overseas territory has only 56 square kilometers area and 65,000 population, but it was very well developed. People are very welcome and helpful. Cities (Hamilton and St. George) are clean and organized. Services are reliable and trustable. Tap water is crystal clean and drinkable. I didn’t feel any difference as in Canada or the United States.  I feel safe and comfortable there.

I also bought a book “The Story of Bermuda and her People (Third Edition)”in a local bookstore to know more about the isles and have some eye-open discoveries. It is the most isolated island on the globe, but it was settled by human beings since 1609. It has the long-last constituency system and justice system. Its GDP per capita is higer than the United States. It issues its own currency, has its own securities exchange, and is the largest offshore insurance/reinsurance centre in the world. I understood that Bermuda’s success doesn’t come from its beautiful natural scenery, but from its stable and reliable governance and legal system. This is the first point investors will consider before the put money in.

But what does all of these relate to ETF?

As an ETF enthusiast, I’d like to link many thinks to ETF. If I want to invest in Bermuda, can I implement this idea by the vehicle of ETFs? The answer is yes. I searched etfdb.com of ETFs with Bermuda exposure and found it refers to 144 ETFs which was really surpringly much. I picked one with symble SEA and digged some distance further.

SEA is the Guggenheim Shipping ETF, issued by Guggenheim investments, a US asset managemtn company. From the fund’s SEC Form N-Q, I found the detail of this fund’s exposure to Bermuda:

 

Bermuda ETF

It shows the fund has 24% percent exposure to Bermuda. Actually among these holdings, most of them are not physically operating in Bermuda or listed in Bermuda securities exchange. They are incorporated in Bermuda, but cannot reflect Bermuda’s economic activities. Let’s have a closer look:

1, COSCO Pacific Ltd. This is a container shipping company controlled by a Chinese state-owned company. It is listed at Hongkong Stock Exchange with trading code 01199. The majority of its business is in mainland China.

2, Nordic American Tankers Ltd. The company was incorporated in Bermuda in 1995 and listed on NYSE by the symbol of NAT.

3, Ship Finance International Ltd. It is registered in Bermuda as a limited liability company. Its shares are trading on NYSE by the symbol of SFL.

4, Stolt-Nielsen Ltd. It is registered in Bermuda but headquatered in Rotterdam.Its shares are trading with the symbol of SNI on Oslo Børs, the stock trading exchange in Norway.

5, BW LPG Ltd. The company is registered in Bermuda and listed on Oslo Stock Exchange with the ticker BWLPG.

6, Tsakos Energy Navigation Ltd. The TEN company is incorporated in Bermuda, managed out of Athens Greece, and listed in the NYSE under the symbol TNP, and in the Bermuda Stock Exchange (BSX) under the symbol TEN.

7, Avance Gas Holding Ltd. The company is registered in Bermuda. It becomes a publicly listed company on Oslo Stock Exchange on April 15th 2014, trading under the ticker AVANCE.

8, GasLog Ltd. The company is registered in Bermuda, headquartered in Monaco, listed on the NYSE with the symbol GLOG.

To sum up all the information collected above, there are a few takeaways. Firstly, with the prosperity of ETFs, more and more country/territory specific products are created, investors have much better accessibilities; Secondly, as there are so many funds expose to the same country/territory, screening is a must have skill. Lastly and most important, to make sure you get the right exposure you want, it’s imperative to do the due diligence work, read the index methodologies, review the holdings.