Russia Energy ETF: Big Risks, Bigger Rewards

I believe a more likely risk is one of uncomfortable volatility in concert with other emerging markets, or a decline in the price for resources. The fund has a beta of 1.36, compared to 1.00 for the S&P 500, and annualized volatility of 24.80, according to Van Eck, compared to 10.64 for the S&P 500, according to PortfolioScience.com.

If the Market Vectors Russia ETF does interest you, it would probably be worthwhile to compare it to the SPDR S&P Emerging Europe Fund (GUR Quote). GUR is more of a regional fund, with only 59% invested in Russia. GUR also has 14% in Poland, 10% in Turkey, 7% in Hungary and 10% in a few smaller countries.

Even though 41% of the fund is outside of Russia, the largest non-Russian holding is OTP Bank from Hungary, with only a 3.25% weight.

I believe the biggest difference between the two is that GUR has a couple of much larger single-stock weights than RSX. Gazprom (OGZPY Quote) is the largest holding in GUR at 20.86%, followed by Lukoil (LUKOY Quote) at 10.7% and Surgutneftegaz at 9.25%. Twenty percent of an emerging-market ETF being in just one stock should be a red flag to seek alternatives, which is why I think RSX might be a superior way to buy the Russian market.

So what is an appropriate allocation to a fund like RSX? I tend to view these things conservatively. Buying Russia, however you do it, is buying volatility. No one buys Russia with the expectation it will be up 8% for the year.

With that mindset, I tend to be conservative with this type of allocation, starting an emerging-market holding at 2% to 3% of the equity portion of the portfolio, with an eye toward using a stop order for part of the position if it grows to 5% to 6%.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Market Vectors Russia ETF and SPDR S&P Emerging Europe Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.