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LONG READ: Shopping for Russian stocks with ETFs

LONG READ: Shopping for Russian stocks with ETFs
Russia’s stock market has returned about 30% this year making it one of the best performing in the world, and the easiest way to invest is with an ETF
By Ben Aris in Berlin September 17, 2019

Russia’s stock market has returned about 30% this year making it one of the best performing in the world, but as a retail investor how do you go about buying some Russian shares if you think the rally is going to continue?

Investing into Russian equity is a rollercoaster ride, but when the market performs, it flies. So far this has been one of the up years with Russian stocks outperforming not only the other emerging markets, but even the US S&P500 index. The benchmark MSCI Emerging Markets Index has gained 3.42% in 12 months, the S&P500 gained 5.27% for the same period whereas the Russia Trading System (RTS) Index gained 36.57%. And on top of that investors earned an additional 9.29% if you count the generous dividend payments companies dish out to shareholders.

Once limited to the big gun institutional investors, more recently buying exotic stocks like Russian shares has been made easy and cheap by the advent of exchange-traded funds (ETFs).

In the old days you had to set up a brokerage account and order your broker to buy the shares for you. These accounts are complicated to create and expensive to use as you get charged for each transaction. The alternative is to invest into a fund, but most of these have a 2+20 deal where the fund manager takes a 2% commission management fee each year and keeps 20% of any profit the fund makes. One of the biggest appeals of an ETF is they charge you a flat fee, typically less than 1% of the money under management, making them a far cheaper way to invest into somewhere like Russia.

ETFs carry an “expense ratio”. If this ratio is 0.5% then the fund will cost you $5 in annual fees for every $1,000 you invest. The average ETF expense ratio is 0.74%, according to Morningstar Investment Research.

ETFs take a lot of the legwork out of buying shares as they come as a premade bundle of stocks – typically the biggest and most liquid bluechip names – that are designed to give an investor an nice balanced portfolio.

And ETFs are sold under various wrappers such as index trackers or growth names. A second appeal of the ETFs is they are themselves listed on exchanges so they are easy to cash out of as the fund itself can be sold at any time.

The no-frills rock bottom price of ETFs meant that investors have traded in their expensive brokerage accounts for ETFs and the bulk of equity investments into Russia are now made via ETFs, contributing to the death of the famous investment banking names of the 90s like Troika Dialog, Renaissance Capital and Aton.

Russian ETF dozen

Despite the size of Russia’s market there are actually only a dozen Russian ETFs that cover the market and only two ETFs – ITI Funds RTS Equity UCITS ETF (ticker: RUSE) listed in Moscow and London and NEXT FUNDS Russia RTS Linked E (ticker: 1324) listed in Tokyo – that track the leading dollar denominated RTS Index that is the benchmark for most international investors.

The two biggest and best-established Russian ETFs are American. There are six US traded ETFs in all, but VanEck Vectors Russia ETF (RSX) and iShares MSCI Russia ETF (ERUS) have by far the most assets under management (AUM) of $1.1bn and $653mn respectively.

The other US traded funds are small with the Direxion Daiy Russia Bull x3 Shares (RUSL) having only $82mn and its “Bear” counter (RUSS) part a mere $20mn under management. The new kid on the block, the recently established Franklin FTSE Russia ETF (FLRU), still only has $14.7mn of assets.

However, the performance of all these ETFs this year has been outstanding, with all of them returning between 20% and 30% YTD as of the end of August, and the Direxion Bull fund is up 67.6%.

(The Direxion Bull fund is special fund, structured so that it multiplies by three the market gains, while its sister “bear” fund multiples the falls and is down by just under 50% this year as a result. It is also extremely expensive with a expense ratio of 1.1%.)

Even the latest entry into the game, the Franklin FTSE, is up by a handsome 29.4% over the period.

And if you were clever enough to buy a Russian ETF in the last few years then they have made good returns as the country emerges from the crisis that started in 2014. The VanEck Vectors Russia ETF has been making gains all year – 7% in four weeks, 13% in 26 weeks. The fund suffered this summer from a brief sell-off, but overall it made a 24.3% return YTD this year, which is the bulk of the 25% it returned in the last 12 months.

The returns are high, but the US ETFs are expensive to use by ETF standards. The VanEck Market Vectors Russia ETF has a 0.63% expense ratio, but high liquidity and tight bid/ask spread balance this higher cost. The fund was set up in August 2007, at the height of the last bull market, but was losing money from April 2011. The crisis years of 2014-2016 hurt the fund badly, and it posted a -57.82% loss over the last five years. But if you had invested three years ago when the recession started to recede the fund would have returned a whopping 40%. Investing is Russia has always been about getting the timing right in the extremely volatile market.

iShares MSCI Russia Capped ETF takes a different approach, tracking the benchmark MSCI Russia 25/50 Index, a free float-adjusted market cap weighted index confined to the top 85% of stocks listed on Russian exchanges. In other words, it only buys shares in the biggest companies. It is also expensive to use with an expense ratio of 0.62% but tight bid/ask spread that saves you money when you want to cash out. The fund has been in existence since November 2010, posting a dismal five-year return of -53.69% but a whopping 54.5% over the last three years.

Gazprom is both funds’ biggest holding, with a weighting of 7.7% and 8.67% respectively from the two dozen names both funds hold.

Looking down the list of the US funds (but discounting the Direxion funds) they have all very similar profiles and returns as they all more or less invest in the same top 25 liquid big cap names. These are not index trackers, but simply buy into the leading Russian bluechips with a bias towards the names with the largest capitalisations, which are mostly from the energy and raw materials sectors.

VanEck is typical and holds 26 stocks that make up a who’s who of Russian publically traded companies:

VanEck Vectors Russia ETF portfolio and weightings
Gazprom PAO (OGZD:LSE) 0.0797
Sberbank Rossii PAO (SBER:LSE) 0.0778
NK Lukoil PAO (LKOD:LSE) 0.0738
Tatneft' PAO (ATAD:LSE) 0.0623
GMK Noril'skiy Nikel' PAO (MNOD:LSE) 0.0602
Novatek PAO (NVTK:LSE) 0.0595
Surgutneftegaz PAO (SGGD:LSE) 0.0499
NK Rosneft' PAO (ROSN:LSE) 0.0491
Yandex NV (YNDX) 0.044
Magnit PAO (MGNT:LSE) 0.0423
X5 Retail Group NV (FIVE:LSE) 0.0416
Transneft' PAO (TRNFP:MCX) 0.0387
Mobil'nye Telesistemy PAO (MBT) 0.038
Polymetal International PLC (POLY:LSE) 0.037
EVRAZ plc (EVR:LSE) 0.0328
Source: VanEck Vectors Russia ETF

From this list of names several of the companies have proven to be good investments this year. Gazprom saw its share price soar in May when the management unexpectedly doubled its dividend payout. Surgutneftegaz also put on 20% at the start of September in a day when it hinted that it may start investing some of its famous $50bn cash pile. And both Novatek and Lukoil are currently investor darlings that have seen their share price double in value in the last year, as they are sensibly run companies that are growing strongly.

Although oil and gas companies dominate the market’s capitalisation, the Russian stock market is already diversified enough that a bluechip list like this also gives investors some exposure to the other sectors. The three names that stand out are internet search engine Yandex, Mobile TeleSystems (MTS) phone company and X5 Retail Group, Russia’s leading supermarket chain.

All of these companies give an investors a piece of the emerging middle class story and a little taste of the booming “new economy” businesses as Russian retail rapidly goes online. X5 was one of the first stocks to respond to the end of the recession and saw its stock price double in 2017 as the market rerated. Yandex is one of a handful of Russian companies whose share prices have regained their pre-Crimea crisis IPO valuation.

For investors that want some exposure to the smaller companies like national airline Aeroflot, the technology company Qiwi, multi-industry conglomerate AFK Sistema and mid-tier Credit Bank of Moscow, then the VanEck Vectors Russia Small-Cap ETF is the only ETF that invests in these sorts of stock. 

Russian ETFs in the rest of the world

The other ETFs are traded on a variety of exchanges where they target their local investors.

For example France’s Lyxor PEA MSCI Russia IMI Select fund (PRIS) is traded on Euronext in Paris and ComStage Dow Jones Russia GDR  (CBMRUC30) is traded on half a dozen German exchanges. Both of these funds are relatively small and have about $20mn AUM. The Next Funds Russia RTS Linked fund (1324) is the biggest ETF outside of the US with $1.3bn but is only traded on the Tokyo exchange.

Almost all the ETFs invest into equities, but you can make an ETF out of anything and ITI Funds has also set up one of only two Russian bond ETFs, the ITI Funds Russia-Focused USD fund (RUSB) that is domiciled in Luxembourg but publically traded in Moscow, London and Kazakhstan.

Russian bonds have been on a tear in the last few years thanks to their winning combination of high yields and almost no risk. The Russian Ministry of Finance ruble-denominated OFZ treasury bills have been paying out between 7% and 9% over the last two years – on a par with long-term equity investment returns.

Conservative investors prefer Russia’s bonds, which are some of the best performing among emerging market bonds. The prices of Russian dollar-denominated Eurobonds are back to pre-sanction levels and despite global markets seeing almost $1.5 trillion dollars of outflows in recent trading sessions, the performances of Russian sovereign bonds have been at 12-month highs.

The ITI Funds RUSB bond fund holds top Russian corporate and sovereign Eurobonds and has returned a whopping, by bond fund standards, 15.4% return in the last 12 months.

Like the equities, the returns from investments into Russian bonds are supercharged by the generous coupon payments, making them even more attractive for investors. The average coupon payment adds another 5.61% to returns in dollar terms.

In general investors have been heavily overweight Russian bonds for most of the last three years. Since the government could cover its entire external debt dollar for dollar in cash since February, and more recently Russia’s entire public debt since August, there is an almost zero chance of default on these high yielding obligations.

“In the whole world there are only two bond ETFs focusing on Russia,” says Gleb Yakovlev, the CEO of ITI Funds. “The ITI bond ETF gives an investor exposure to Russia’s sovereign Eurobonds, but it doesn't include all the bonds. Those that are going to mature in less than one and a half years are excluded as are bonds that have anything less than rating level. The bonds of Russian companies under sanction have also been excluded.”

There are 16 bonds in the ITI Funds RUSB bond fund, all of which are senior debt so if there is a default then the fund is first in the queue to reclaim its money. Another difference between the equity and bond funds is the equity fund pays out dividends to its shareholders whereas the bond fund takes coupon payments and reinvests them.

“Equity is more dangerous than bonds so we have a principle to pay out dividend payments to the investors, while bonds are safer so we reinvest the coupon payments,” says Yakovlev.

London-based ETFs

For investors that want to buy an ETF in London there are also half a dozen choices: iShares MSCI Russia ADR/GDR UCITS ETF (CSRU), ITI Funds RTS Equity UCITS ETF (RUSE), HSBC MSCI Russia Capped UCITS (HRUD), FinEx Tradable Russian Corporative (FXRU) and Invesco RDX UCITS ETF (RDXS).

From all these funds the ITI Funds and FinEx ETFs are the cheapest to use with an effective cost ratio of only 0.5% and the ITI Russia equity fund is the best performing having returned 29% YTD, well ahead of the average of 18% for the European group of funds.

The outstanding feature of the ITI Funds RUSE equity ETF is it tracks the RTS index rather than simply buying a mix of the biggest names on the Russian stock market as most ETFs do.

Launched in the spring of 2018 the ITI Funds RUSE equity fund is targeting institutional investors and has been set up to appeal to them. It is UCITS 5 qualified – the highest standard of transparency and reliability – and domiciled in Luxembourg to provide the best in international support and custodial services to investors.

Currently the ITI Funds RUSE equity fund has $6.8mn assets under management, while the bond fund is a little bigger with $8.2mn. Still small in size, the two funds are aggressively raising money and the managers hope they will grow rapidly once they get up to $50mn in size.

“There are already institutional investors in the fund but they are just dipping their toes in the water now. One of the problems in Russia is that the investors are still not very clear what an EFT is. There is a process of education to go through,” says Yakovlev.

Name

Ticker

Asset Class focus

Country of Incorp

Total expense ratio

Exchange market

Tracking index

AUM, (M USD)

YTD

5Y

Company

Inception Date

Lyxor MSCI Russia UCITS ETF

RUS

Equity

Luxembourg

0.65%

1. Euronext Paris
2. Borsa Italiana

MSCI Russia Index

369.982

24.75%

25.64%

Lyxor Intl Asset Management

06/22/2006

iShares MSCI Russia ADR/GDR UCITS EFT

CSRU

Equity

Ireland

0.65%

1. London
2. Switzerland
3. Borsa Italiana
5. Euronext Amsterdam

 

254.995

25.29%

24.95%

BlackRock Inc JP Morgan House International Financial Services

09/15/2010

Xtrackers MSCI Russia Capped Swap UCITS EFT

XMRC

Equity

Luxembourg

0.65%

1. Xetra
2. Singapore
3. London
4. Germany
5. Borsa Italiana
6. Stockholm
7. Stuttgart

MSCI Russia Issuers Capped 25% Index

171.713

23.04%

21.92%

Xtrakers

02/07/08

HSBC MSCI RUSSIA CAPPED UCITS ETF

HRUD

Equity

Ireland

0.6%

1. London

MSCI Russia Capped Index

60.308

17.65%

0.11%

Xtrakers

07/05/11

FinEx Tradable Russian Corporate Bonds ETF

FXRU

Bonds

Ireland

0.5%

1. London
2. Moscow

MSCI Russua IMI Select GDR Index

66.174

8.13%

7.22%

FinEx Funds PLC

02/25/2013

Lyxor PEA MSCI Russia IMI Select GDR UCITS EFT

PRUS

Equity

France

0.65%

1. Euronext Paris

 MSCI Russua IMI Select GDR Index

23.443

24.74%

25.91%

Lyxor Intl Asset Management

05/28/2014

ComStage Dow Jones Russia GDR UCITS EFT

CBMRUC30

Equity

Luxembourg

0.6%

1. Germany
2. Xetra
3. Berlin
4. Dusseldorf
5. Frankfurt
6. Hamburg
7. Minich

Dow Jones Russia GDR Index

20.798

21.69%

25.09%

Commerz Funds Solutions S.A.

12/05/08

FinEx Russian RTS Equity UCITS ETF

FXRL

Equity

Ireland

0.9%

1. Moscow

 RTS Index

13.691

28.60%

12.09%

FinEx Funds PLC

03/02/16

NEXT FUNDS Russia RTS Linked ETF

1324

Equity

Japan

0.95%

1. Tokyo
2. Japan

 Russia RTS index

1,345.000

20.84%

-0.29%

Nomura Asset Management Co.,Ltd.

07/29/2008

Invesco RDX UCITS ETF

RDXS

Equity

Ireland

0.65%

1. London
2. Borsa Italiana

Russian Depositary Index

10.19

22.56%

3.02%

Invesco EMEA ETFs

01/28/2010

KIM KINDEX MSCI Russia ETF

265690

Equity

Korea

0.5%

1. South Korea
2. Korea Stock Exchange

MSCI Russia 25% Capped Total Return Index

10,835.110

24.96%

6.07%

Korea Investment Trust Mgmt Co.

03/21/2017

ITI Funds Russia-Focused USD Eurobond UCITS ETF

RUSB

Bonds

Luxembourg

0.5%

1. Moscow
2. London
3. Nur-Sultan

ITI Funds Russia-focused USD Eurobond Index

12.247

10.47%

8.80%

Fuchs Asset Management S.A.

04/17/2018

ITI Funds RTS Equity UCITS ETF

RUSE

Equity

Luxembourg

0.65%

1. Moscow
2. London
3. Nur-Sultan

RTS Index

6.953

29.67%

7.74%

Fuchs Asset Management S.A.

04/17/2018

KSM ETF 4D Russian Depositary ETF

KSMF65

Equity

Israel

1.01%

1. Tel Aviv

Russian Depositary Index

-

 

 

KSM MUTUAL FUNDS LTD

11/20/2018

VanEck Vectors Russia ETF

RSX

Equity

USA

0.64%

1. U.S.
2. NYSE Arca

MVIS Russia TR Index

1,062.870

20.69%

5.11%

VanEck Vectors ETF Trust

04/30/2007

iShares MSCI Russia ETF

ERUS

Equity

USA

0.62%

1. U.S.
2. NYSE Arca

 MSCI Russia 25/50 Index

607.78

24.09%

10.78%

BlackRock Fund Advisors

11/10/10

Direxion Daily Russia Bull 3x ETF

RUSL

Equity

USA

0.95%

1. U.S.
2. NYSE Arca
3. Mexico
4. NYSE American
5. NASDAQ
6. NYSE National

Market Vectors Russia Index

67.922

53.67%

-11.24%

Direxion Shares ETF Trust

05/25/2011

VanEck Vectors Russia Small-Cap ETF

RSXJ

Equity

USA

0.75%

1. U.S.
2. NYSE Arca
3.Chile
4. NYSE American
5. NASDAQ OMX BX
6. NYSE National

MVIS Russia Small-Cap Index

32.951

23.46%

-16.34%

VanEck Vectors ETF Trust

04/14/2011

Direxion Daily Russia Bear 3x ETF

RUSS

Equity

USA

0.95%

1. U.S.

Market Vectors Russia Index

25.495

-46.19%

-47.57%

Direxion Shares ETF Trust

05/25/2011

Franklin FTSE Russia ETF

FLRU

Equity

USA

0.19%

1. U.S.
2. NYSE American
3. NASDAQ OMX BX
4. NYSE National
5. Chicago
6. New York

FTSE Russia RIC Capped Index

13.79

25.40%

10.04%

Franklin Advisors Inc 

02/06/18

source: bne IntelliNews

 

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