Russian IPO Could Broaden ETF

A new IPO in Russia may cause a shakeup in the index backing the Market Vectors Russia (RSX - commentary - Trade Now) ETF. This fund has performed well this year, gaining nearly 150% year to date through Nov. 18.

An IPO for UC Rusal, the nation's aluminum giant, is tentatively scheduled for December. The 10% stake offered to investors is expected to net the firm $2.5 billion. These funds will be used pay off some creditors, including the Kremlin, which through the state bank Vneshekonombank provided Rusal with a $4.5 billion loan last year during the global economic turmoil. According to The Wall Street Journal, Vneshekonombank has shown interest in participating in the IPO, and it already owns part of some Rusal units as collateral.

If Rusal's IPO is successful, the firm may find its way into the DAXglobalSM Russia+ Index, which RSX tracks. While the index and the RSX have performed well as of late, by focusing nearly half of its assets in the oil and gas industry the two remain dangerously underdiversified. Any drastic market swing in the energy sector could seriously damage this fund.

With another 17% in iron and steel, the index has two-thirds of its assets in the energy and materials sector. Hopefully, Rusal's addition would at least diversify the commodity exposure.

Investors should be wary before adding too much exposure to this instrument because it is volatile and has both country and sector risk. Investors should also be cautious because if today's move is the start of broader market slide, RSX could easily drop 10% to around the $28 level.

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At the time of publication, Dion Money Management was long RSX.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.