Sponsored by:

RSX: Ukraine Crisis Underscores Danger in Single-Country ETFs

When worst-case pressures like economic sanctions and even the threat of war take hold, it's a whole different ballgame

   
RSX: Ukraine Crisis Underscores Danger in Single-Country ETFs

Narrow sector exchange-traded funds and single-country ETFs are just as risky as individual stocks.

russia iconic st basil cathedral 300x227 RSX: Ukraine Crisis Underscores Danger in Single Country ETFs
Source: Flickr

Just take a look at the premier Russia ETF, the Market Vectors Russia ETF (RSX), for proof.

RSX — a fund that holds Russian companies such as Gazprom (OGZPY), Lukoil (LUKOY) and Sberbank (SBRCY) — is off 17% for the year-to-date, with most of the drop coming since February when Ukraine boiled over into a full-scale international crisis.

Of course, that figure also includes a big rebound yesterday, sparked by news that talks in Geneva to disarm the conflict were progressing.

Nonetheless, we’ve had moments where peace seemed on the horizon prior to this, so nothing’s certain until ink is dry. And even then…

RSX: Ugly to Begin With

The Russian economy and RSX haven’t been doing well for years. The red-hot and accelerating growth that characterized Russia in the first half-dozen years of the 21st century flamed out with the global recession. Today, the country has high inflation and almost no growth — stagflation — and is barely holding on to positive GDP.

And that was before the U.S. and European Union slapped sanctions on Russia over its actions in Ukraine and Crimea.

Further sanctions would spark another recession in Russia, according to World Bank estimates.

Russia and RSX had been out of favor with investors long before the crisis in Ukraine. Once a core emerging markets holding — the “R” in the BRIC block of Brazil, Russia, India and China — sluggish growth, corruption, weak oil and gas prices and terrible demographics were already weighing on RSX. The bear case on RSX — as well as its small-cap counterpart, the Market Vectors Russia Small-Cap ETF (RSXJ) — was easy to make based on the above factors and more.

As for the bulls … well, like pretty much all beaten-down emerging markets, RSX looked cheap. Russia is an enormous country with a $2 trillion economy and is the world’s top producer of oil and natural gas. A Russia ETF like RSX certainly was a way to buy at a point of deep pessimism and perhaps even value.

Which is what makes the crisis in Ukraine such a valuable lesson for anyone looking at country ETFs.

In Times of War, All Bets Are Off

The bears had plenty of ammunition in their case against Russia and RSX — but no one saw this coming. What started as a protest against the government in Ukraine morphed into an international crisis.

The idea that RSX and the Russian economy would be derailed by an invasion of Crimea — and now possible civil war in Ukraine — didn’t enter into the discussion before February.

Now it’s all that matters.

Hopes are riding on the current talks. Unless Putin pulls an about-face in Ukraine, the crisis there will deepen. Sanctions will further cripple Russia’s weak economy, and its stock market — and RSX — will continue to fall.

Nathan Rothschild famously said investors should buy on the sound of cannons, and war in Ukraine still looks likely — but in this case, you’re looking at a sucker’s bet regardless.

Institutionally and demographically, Russia is a tire fire. RSX looks like a value trap.

It’s hard enough accounting for all the risks attendant to individual stocks, but at least most CEOs really do try to make their share-prices go up.

Entire countries like Russia are another matter, with too many risks coming from too many directions. Besides, their leaders have bigger aims and worries than publicly traded share prices.

It’s abundantly clear that Vladimir Putin couldn’t care less about Russian stocks, and by proxy, the RSX.

That’s no doubt true for any number of world leaders and the country ETFs tracking their markets.

The takeaway here for any investor is to understand that diversification doesn’t mean absolute security.

It’s good to get your feet wet in several geographic locations, and ETFs like the RSX do provide some amount of diversification by allowing you to invest in several stocks in a single bundle.

But whole countries can deteriorate economically, and when the drums of war beat … the red ink can spill, and spill quick.

Like what you see? Sign up for our ETF Insights e-letter and get picks and advice about these diverse funds delivered to your inbox every Friday!

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/rsx-russia-etf/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.