Resurgent Russian Corporates Present ETF Opportunities
There was a time when investing in Russian corporate was a dubious combination of hard to and not advisable for most investors, even professionals.
In 2004, The Economist ran a story about Russian corporates, noting demand for the asset class was rapidly sinking. Highlighting how dire the situation was at the time, The Economist story was simply titled "Ugh!"
Less than a decade later, things have changed. While R in the famous BRIC acronym must shed a reputation for political corruption and corporate cronyism, the country's financial markets are showing signs of liberalization. Policymakers there have not been shy about their desire for increased foreign investment.
Last year, the Russian government made its sovereign debt more accessible by adding Euroclear and Clearstream to the list of eligible clearing houses.
Euroclear recently confirmed Russian corporates are up next and that could be a boon for a market where foreigners control less than 10 percent of assets, according to Reuters.
In another sign that the Russian corporate bond renaissance is in full bloom, a new ETF devoted exclusively to the asset class debuted yesterday, the Finex Tradable Russian Corporate Bonds Ucits ETF.
Before ETF naysayers and pundits assail the ETF as too risky or too narrowly focused, it must be noted that the Finex Tradable Russian Corporate Bonds Ucits ETF trades on the London Stock Exchange, not in the U.S.
However, the success of the Finex Tradable Russian Corporate Bonds Ucits ETF could be a barometer for whether an ETF tracking Russian corporate debt will be listed in the U.S. Investors do not need to bet on the debut of Russian corporate bond ETF in the U.S., an unlikely near-term proposition, but there are compelling reasons to consider the existing funds with exposure to Russian corporates.
Not only do emerging markets corporates usually feature superior credit quality relative to developed market equivalents, but those EM bonds often have lower durations, meaning they are less sensitive to interest rate changes.
At the end of January, the average yield to maturity on Russian corporates was 5.11 percent with an average duration of just over five years, according to WisdomTree data.
That is a better yield to maturity than what can be had on comparable Mexican or Turkish corporate bonds with a lower duration than what is found on equivalent Brazilian and Mexican corporates.
Investors looking to tap into the favorable tailwinds for Russian company-issued debt have a few ETF options, though stands as most credible. The WisdomTree Emerging Markets Corporate Bond Fund (NASDAQ: EMCB) devotes nearly 21 percent of its weight to Russian corporates. Only Brazil receives a larger allocation in EMCB.
Not only due Russian corporate issues feature high yields, but issuer debt levels are lower than what is seen in other developing nations, giving investors some degree of safety. Important to note is the fact that in 2012, Russian firms issued about $46 billion in corporate bonds compared with $21.7 billion in 2011, according to the Financial Times.
Demand was robust, but issuance may not be as high this year. Russian companies need to finance just $9.5 billion in foreign debt this year, Dow Jones reported.
It is widely expected Russian financial services firms will sell fewer corporate bonds and while OAO Rosneft, Russia's largest oil company, is forecast to issue about $7 billion to help pay for its purchase of TNK-BP, a scarcity premium could creep into the market.
That could lead to upside for EMCB, which has an average yield to maturity of 4.52 percent and an effective duration of 6.1 years. EMCB's rivals, the iShares Emerging Markets Corporate Bond Fund (NYSE: EMCB) and the SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (NYSE: EMCD), feature exposure to Russia though not on par with that of the WisdomTree fund.
Conservative investors that want a small taste of Russian corporates should consider the WisdomTree Global Corporate Bond Fund (NASDAQ: GLCB). That newly minted ETF has a weight of almost 4.5 percent to Russia.
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