With a Russia-focused exchange-traded fund now available to U.S. investors, you don't need to open a brokerage account in Moscow to play the Russian market. Here is a look at a way to start investing in an economy that's been reborn.
R Is for Russia (and Returns)
Brazil, Russia, India and China are the four countries expected to outpace their emerging market peers over the next several decades (see
"'BRIC' ETF Investing: An Introduction"). Of the BRIC countries, Russia is probably the most volatile market and the one that has been on the radar of mainstream American investors the longest.
But if you're interested in investing in Russia, it may be harder to get your foot in the door than you'd expect. Since most Russian companies are not listed on American exchanges, chances are you'll have a hard time buying 1,000 shares of (for example) Russia's largest bank, Sberbank, from your broker. (See
That's where ETF investing comes in. An ETF can make it easy to gain exposure to emerging markets by offering them up in one tidy package. In the case of Russia, the country-specific
Van Eck Global's Market Vectors Russia ETF
, which has only been on the market since May, has already returned more than 13%.
RSX's primary components are in the oil, gas, iron and steel industries. These four areas make up about 58% of the total fund. In all, the ETF represents the 30 Russian
securities from the DAXglobal Russia+
Index. (To learn about ETF investing, visit
If you're thinking about adding RSX to your portfolio, it's worth noting that while it does include a few
ADRs, the majority of the securities it tracks are traded offshore. When you're looking to gain exposure to new markets with vehicles like an ETF, it's always a good sign that it's not composed primarily of ADRs that you can buy here at home.
Other Ways to Capture Russia's Returns
If the Russia-focused ETF isn't your speed, an alternative for coverage of the Russian market can be found by reviewing broader
closed-end mutual funds, such as the
Central Europe and Russia Fund
, which has brought back annualized returns of more than 40% since 2005, as well as
Morgan Stanley's Eastern Europe CEF
, which has brought in about half as much as CEE over the same period.
There are also a couple of Russian ADRs floating around on American exchanges. While the majority of these ADRs trade
over the counter, the heavy hitters of the group, such as the
-traded telecommunications company
, have given investors returns well into the double digits.
Russia's Market Revolution
Frankly, investors have been scared away from Russia in the past and are only now coming back. With the collapse of Russia's economy in 1998, Western investors interested in post-Soviet Russia were sent running for the hills. This is likely one of the reasons that Russia's companies have been
The transition from the centrally planned economy of the Soviet era to the market economy found in Russia today couldn't have been an easy one. Nevertheless, Russia's market infrastructure is now robust and ready for growth.
Since the country's economic meltdown almost a decade ago, the Russian economy has seen awesome growth -- averaging more than 6% per year (see
economic data from the Bank of Russia
). And this economic resurgence is expected to continue: In a statement made earlier this year, Russia's finance minister Alexei Kudrin predicted that investment in Russia will increase 26% this year. (See the
Why is Russia experiencing a high level of investment activity? Russia is a
commodities giant. With massive reserves of oil, coal, natural gas and minerals, the world's demand is certainly helping the country's prospects increase. Russia's vast holdings of these precious natural resources are making it a key player for anyone who's hoping to make some money on rising energy prices (see
"Eni, Gazprom to Link Russia, Europe With Pipeline").
However, to stay competitive long term, in addition to energy, Russia will need to see growth in other sectors (like technology and financial) in the coming years.
R Can Also Stand for Risk
Russia is seen as the riskiest of the BRIC countries. As
Lawrence Carrel wrote in May, "Corruption and a lack of corporate transparency contribute to the market's inherent volatility." (See
Questionable Timing for First Russian ETF".)
With some investors already burned -- or at least scared off -- by Russia's past and present volatile climate, many are reluctant to put money back in the country. Even so, the growth of Russia's economy is proving tempting for those who were once wary of the country.
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.