Russian stocks rise 35% as Ukraine crisis ‘subsides’. These 2 ETFs allow you to play

Below is information on two exchange-traded funds that track the Russian stock market in different ways, along with screens of the largest holdings of each.

The set up

Pictet Wealth Management analysts led by Julian Holtz wrote in a January 27 report that, based on previous conflicts involving Russia, including the 2014 annexation of Crimea (which had been part of Ukraine since the independence of Ukraine from the Soviet Union in 1991), “[a] a 2014-style scenario would imply a low single-digit decline (8%) from here.

Pictet Wealth Management is a unit of the Pictet Group of Geneva, which had approximately $664 billion in assets under management at the end of 2020, based on current exchange rates.

Holtz went on to write, “We could see significant upside potential for the MSCI Russia [Index] over a few months if a de-escalation scenario were to materialize (~35% in USD). »

Russia could be considered a dark market for most US investors. But an easy way to invest in it is with the $473 million iShares MSCI Russia ETF ERUS,
+1.08%,
which tracks the MSCI Russia 25/50 index. Here’s how the exchange-traded fund’s price has moved over the past year to January 31:

Since its intraday peak at $52.80 on October 26, the ERUS has fallen 26% through January 31 to settle at $38.95. Meanwhile, the price of continuous futures for Brent crude oil BRN00,
+0.26%
rose 4% to $89.26 on Jan. 31 from $85.65 at the Oct. 26 close. Meanwhile, the consensus 2022 EPS estimate for ERUS, based on weighted global estimates among analysts polled by FactSet, rose slightly to $7.98 from $7.97.

Holtz wrote that the decline in the MSCI Russia index was “entirely driven by valuations, as high energy prices kept earnings expectations steady.”

He acknowledged the currency risk, as Russia could allow the rubble to lose value, against the dollar, to defend its economy in the event of harsh sanctions. Again, he believes that the downside risk for the ruble is limited due to Russia’s “structural current account surplus (which is expected to remain elevated due to high oil prices and a weak ruble), its low public debt and its high foreign exchange reserves as well as the Bank of Russia’s credibility.

As if to underline Russia’s importance as a fuel supplier to Europe, the Moscow Times reported on Tuesday that Gazprom PSJC RU:GAZP
had doubled the capacity of its Ukrainian gas pipeline in January.

Screening of Russian stocks

Russia’s economy and stock market are dominated by the production and export of oil and natural gas. And the iShares MSCI Russia ETF is highly concentrated, with the top five holdings accounting for 56% of the 26-stock portfolio. FactSet explains that this concentration gives market-like exposure to Russia because it is “incredibly heavy.” Five of ERUS’s top 10 holdings are oil and/or gas companies which make up 47% of the portfolio.

Another great ETF with a different take on the Russian market is the $1.2 billion VanEck Russia ETF RSX,
+0.90%.
It holds 29 stocks and is much less concentrated, with the top five holdings accounting for 37.5% of the portfolio. According to FactSet, the RSX “doesn’t necessarily resemble the vast space of Russian equities” due to its greater diversification and limited exposure to the energy sector. Again, of his top 10 holdings, five are oil and/or gas companies, and these make up 35% of the portfolio.

Here is a chart comparing the two ETFs, showing a similar trend but better performance for ERUS over the past five years to January 31:

Most of the shares held by ERUS are traded locally, while most held by RSX are US Certificates of Deposit (ADR) or Global Certificates of Deposit (GDR) traded in the UK or US.

Here are lists of the top 10 holdings of each ETF, along with opinion summaries among analysts polled by FactSet. Share prices are expressed in local currencies.

First, here are the top 10 holdings of the iShares MSCI Russia (ERUS) ETF:

Society	Teleprinter	Share of ERUS portfolio	Share notes “buy”	Closing price – January 31	The inconvenients. target price	Implied 12-month upside potential
Gazprom PSJC	RU:GAZP	19.8%	94%	334.80	504.95	51%
Lukoil PJSC	RU:LKOH	14.3%	87%	6,878.00	8,603.92	25%
Sberbank Russia	UK:SBER	11.9%	94%	264.50	430.25	63%
Norilsk Nickel Mining & Metallurgical Co.	UK:GMKN	5.3%	36%	21,916.00	25,831.21	18%
Novatek JSC RDA	NVTK, +1.14%	4.9%	67%	209.90	277.98	32%
Tatneft PJSC	UK: TATN	4.3%	69%	499.70	701.42	40%
TCS Group Holding PLC GDR	TCS, +3.23%	3.9%	53%	71.20	93.20	31%
Rosneft Oil Co.	RU:ROSN	3.6%	79%	576.95	795.62	38%
Yandex NV Class A	YNDX, +1.22%	3.1%	100%	48.06	84.91	77%
Polyus PJSC	PLZL-RU	2.6%	55%	12,230.00	16,884.18	38%
Source: FactSet

On the above list of major ERUS holdings, all shares are locally traded in Russia, except for the two GDRs traded in the UK (as indicated by the “UK:” in the tickers) and Yandex NV YNDX,
+1.22%,
which is listed in the United States

And here are the top 10 holdings of the VanEck Russia ETF (RSX):

Society	Teleprinter	RSX Portfolio Share	Share notes “buy”	Closing price – January 31	The inconvenients. target price	Implied 12-month upside potential
Gazprom PJSC ADR	OGZD, -0.42%	8.5%	100%	8.63	13.27	54%
Lukoil PJSC ADR	LUKOY, +2.01%	8.0%	86%	88.87	113.62	28%
Sberbank Russia PJSC ADR	SBRCY, -1.04%	7.6%	N / A	13.67	N / A	N / A
Novatek JSC RDA	NVTK, +1.14%	6.8%	67%	209.90	277.98	32%
Norilsk Nickel Mining & Metallurgical Co. ADR	MNOD, +1.67%	6.6%	40%	28.12	34.04	21%
Tatneft PJSC RDA	ATAD, -0.68%	6.1%	69%	38.38	57.26	49%
Rosneft Oil Co. GDR	ROSN, +0.78%	5.4%	85%	7.41	10.81	46%
TCS Group Holding PLC GDR	TCS, +3.23%	4.3%	53%	71.20	93.20	31%
Polyus PJSC RDA	PLZL, +2.44%	3.9%	55%	78.00	111.69	43%
Polymetal International PLC	POLY, +1.41%	3.5%	72%	10.61	16.57	56%
Source: FactSet

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