Russian President Vladimir Putin and U.S. President Joe Biden agreed to a summit on Ukraine yesterday, but it has not stopped Russian stocks from crashing. The Financial Times reports that Russia has seen its two most volatile trading days this week since its 2014 invasion of Crimea. Among the losers of the Russian stock crash is a certain exchange-traded fund (ETF). To be more specific, the Direxion Daily Russia Bull 2X Shares (NYSEARCA:RUSL) has been crashing today. Indeed, the RUSL ETF fell 30% in premarket trading and hasn’t stopped since.
What’s Happening With the RUSL ETF
As of this writing, the RUSL ETF is down more than 21% for the day. It has not rebounded since plunging on Friday, Feb. 18 amid rising geopolitical tensions. The leveraged ETF invests in Russian stocks by tracking the MVIS Russia Index index. RUSL aims to generate 200% of the index’s performance on a daily basis.
Why It Matters
This type of mission can make leveraged ETFs attractive to investors. However, times like this are a good reminder of the type of risk that they carry. When the financial markets of an entire country are jeopardized by global events with economic sanctions looming, these funds are at risk for losses equal to their rate of return.
So far, Russian investors are paying the price for the Ukraine conflict. Yesterday saw the MOEX stock index of Moscow tumble by 10%, amounting to losses for the year of roughly 20%. Russia’s Central Bank has promised to extend a “liquidity lifeline” to its country’s financial institutions, but it does not seem to be helping stocks recover.
Experts don’t expect to see Russian stocks rebound in the near future. CNN reports that JP Morgan Chase (NYSE:JPM) analysts have reiterated their rating of Russian equities as overweight, a downgrade from neutral. The team expects to see future declines from Russian markets in the near future.
What It Means
Last week, Keith Lerner of Truist Advisory Services predicted a “tempered reaction” to the Russia-Ukraine conflict. He cited previous geopolitical events that posed only a short-term effect on financial markets, such as the Iraq War of 2003 and the 1962 Cuban missile crisis. As this conflict develops, however, it looks less and less like Russia is destined for a quick economic recovery.
The extent to which the current tensions will persist remains unclear, as do any long-term effects on global markets. For as long as it does, though, Russian markets are likely to struggle. The United Kingdom has already announced economic sanctions against Russia, and the U.S. is likely to follow.
None of this bodes well for an investment vehicle like the RUSL ETF. The fund’s fact page notes that it is best suited for investors with the ability to “respond to changing market conditions and fund performance.” In instances like this, though, even constant market vigilance does not make the ETF a good buy. Its success is dependent on the financial strength of a country that is squaring off against most of the world with economic superpowers already taking action against it. Investors should keep an eye on it, but proceed with extreme caution.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.