Russia Energy ETF: Big Risks, Bigger Rewards

This column was originally published on RealMoney on May 8 at 2:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

If you follow the ETF space at all, you know there has been a flood of products brought to the market and a slew of funds waiting for approval. Among the various registrations from all the providers are a lot of funds that don't make a lot of sense.

One fund company that seems to have done a good job at picking and choosing its spots and avoiding the head-scratchers has been Van Eck.

Its latest fund is the Market Vectors Russia ETF (RSX), which listed a couple of weeks ago and mimics the DAXglobal Russia+ Index. The market had been clamoring for a Russia fund for several years, and this is the first one.

You don't need to be much of an expert on Russian politics to know that the country's stock market has the potential for big risks and big rewards.

As you might expect, the fund is heaviest in energy, at 40%. The fund also has exposure to telecom, 17%; iron/steel, 12% and electric, 11%. Like most single-country ETFs, RSX has a larger-cap bias. Van Eck draws the large-cap line at $6.0 billion, and 92% of the fund is large-cap.

The past results of the index have been very strong. Its one-year return was 41.36%, and its five-year average annualized return is 48.30% compared to a one-year of 20.65% and five-year of 24.45% for iShares MSCI Emerging Markets Index. The numbers are eye-popping, but obviously Russia has benefited from higher oil prices and increased global demand for commodities. A visible threat to investing in Russia would be the collapse of either or both themes.

Vulnerabilities and Alternatives

Another potential risk is that the fund only owns 30 stocks, and five of the 30 have weightings of 7% or more (Unified Energy Systems is the largest holding at 8.35%). Any sort of Yukos-like death blow to one of those five, albeit unlikely, would severely impact returns.