In the wake of the recent downing of Malaysian Air Flight 17 over Ukraine, political and financial tensions are intensifying for Russia. The U.S. tightened economic sanctions on Russia even as the news of the tragic plane crash was breaking at the end of last week. And this week, European Union officials lobbed their own sanctions at Russia.
From an investing perspective, many questions may arise: Do you know if your foreign stock fund invests in Russian stocks? Is now a good time to buy funds investing in Russia, or is now a good time to sell?
And if you think now is a good buying opportunity, which funds are best?
The Biggest Foreign Funds – Not Too Exposed to Russian Stocks
Exposure to Russian stocks is likely to be minimal if you invest in one of the world’s largest foreign stock funds. For example, the total assets (including all share classes) of American Funds EuroPacific Growth (AEPGX) is $127 billion, which makes it one of the largest mutual funds in the world. The top Russian holding is Internet company Yandex (YNDX), which only represents 0.5% of the fund portfolio. There’s not much exposure to Russia here.
A bit more value-leaning than EuroPacific Growth, Dodge & Cox International Stock (DODFX), which manages $63 billion in assets, had zero exposure to Russian stocks as of June 30. When a value shop like Dodge & Cox turns up its nose to Russian stocks, you have to wonder about the Russian economy. How low do prices have to fall to become a value?
For a broader perspective, consider the exchange-traded iShares MSCI Emerging Markets (EEM). The top Russian holding is OJSC Magnit GDR (MGNT) — a top food retailer in Russia — at a mere 0.4% of the portfolio.
For added reference, on July 21, MGNT was down 3.35%, and EEM was up 0.4%. In other words, the exposure and impact of political and economic events in Russia is insignificant in this fund, as is the case with most foreign stock funds.
So How Do You Buy Russian Stocks?
It is difficult to know whether now is a good buying opportunity for Russian stocks. Prices are certainly falling now but is Russia a value? The MICEX Index, which is something like the Russian version of the Dow Jones Industrial Index, fell 6.5% in just a few days of trading since Malaysian Air Flight 17 was shot down.
Even if industries in Russia have products and services of value to share with the world, it is difficult to grow without sufficient capital.
The Ukraine standoff had already begun to chase capital out of Russia, and rising tensions today do not bode well for the Russian economy — at least in the short term. But some aggressive investors might be willing to stick their necks out now, assuming things don’t get much worse for the Russian economy in the days, weeks and months ahead.
If you think now is a good buying opportunity, the best way to get concentrated exposure to Russian stocks is through a widely traded ETF (to avoid excessive price volatility, you want to ignore thinly-traded ETFs). Here are a few choice samples:
Market Vectors Russia (RSX)
Market Vectors Russia ETF (RSX) is the most widely traded ETF investing in Russian stocks with $1.5 billion in total assets. The Market Vectors fund does not track an index, but it has a similar portfolio as the MSCI Russia Index, which represents roughly 50 0f the largest Russian stocks by market capitalization.
RSX’s expense ratio of 0.71% is a bit pricey for an ETF, but it’s only slightly higher than other Russia ETFs, and the cost might be worth the relative price stability investing in a market that is associated with volatility. For an example of volatility for Russian stocks, this fund had a 2008 return of -73.6%, but a 2009 gain of 139.2%!
Opening to investors in 2007, the Market Vectors fund also has the longest history of an other Russia ETF.
iShares MSCI Russia Capped Index Fund (ERUS)
The iShares MSCI Russia Capped Index Fund (ERUS) has $308 million in assets, which makes it much smaller than the Market Vectors fund. However, investors might like that ERUS can be considered a true index fund because it tracks the MSCI Russia Index.
The expense ratio of 0.61% also is lower than the the Market Vectors. The slightly lower expenses combined with the attraction of a high correlation to the index might be enough to make this ETF your chosen means of buying into Russia.
SPDR S&P Russia (RBL)
SPDR S&P Russia (RBL) has $24 million in assets, which makes it the smallest of the three Russian ETFs we are analyzing — though certainly not the smallest of its kind in the investment universe.
RBL tracks the S&P Russia Capped BMI Index, which is weighted by market capitalization and represents roughly 50 Russian stocks, making the fund holdings similar to iShares and Market Vectors ETFs.
With an expense ratio of 0.59%, this SPDR fund has the lowest expense ratio of the three ETFs we are analyzing. However, it also has the shortest history with an inception date of March 2010.
With that said, history is not as important in the world of indexing as it is with actively managed funds.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.