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The Good And Bad Of Russia ETFs

August 21, 2018 11:54 am
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Turmoil in Turkey. An ongoing trade spat involving the U.S. and China. A recent pullback in oil prices. Those factors and more are weighing on emerging markets equities.

Russian stocks have not been immune to those scenarios. Year-to-date, the MVIS Russia Index (MVRSXTR) is down more than 6 percent, though that is better than the double-digit loss sported by the MSCI Emerging Markets Index.

What Happened

The Direxion Daily Russia Bull 3X Shares (NYSE:RUSL) and the Direxion Daily Russia Bear 3X Shares (NYSE:RUSS) corner the market for leveraged Russia exchange traded funds. RUSL, the bullish fund, tries to deliver triple the daily performance of the aforementioned MVIS Russia Index while the bearish RUSS looks to deliver triple the daily inverse performance of that benchmark.

With Russian stocks scuffling, RUSL and RUSS are spending some time in the spotlight this month. Entering Monday, the bullish RUSL was one of Direxion's worst-performing bullish leveraged ETFs on a month-to-date basis. Conversely, the bearish RUSS came into Monday with an August gain of over 30 percent, making it one of Direxion's best-performing inverse leveraged ETFs this month.

Why It's Important

Recently announced sanctions against Russia have prompted some traders to consider the bearish RUSS, but that trade may not be as easy as it was a couple of weeks ago.

“So with the rope being tightened on Russia   ̶ many politicians in both parties want to toughen sanctions even further   ̶ the bear trade is a gimmee, right? Not so fast,” said Direxion in a recent note. “In fact many high profile investors have shown a willingness to invest despite the dangers. Investor Jim Rogers, a one-time partner of George Soros, has taken large positions in Russia. Other U.S. investors have found Russian stocks to buy as well.”

To that point, some traders appear to be looking for bargains in Russia. Over the past month, the bullish RUSL is averaging $1.40 million per day of inflows, according to issuer data.

What's Next

Data confirm Russian stocks are cheap, as is usually the case. That could spur more near-term interest in RUSL.

“Traders who can stomach the substantial geopolitical risks see a big pay day. Russian stocks have become extremely cheap,” according to Direxion. “Of the major countries in the world, Russia has become one of the cheapest on measures such as P/E ratio and P/B (price-to-book) ratio. The country’s stocks also boast one of the highest average dividend yields. The current average P/E ratio comes in at just above 7.5. It had fallen as low as 3.5 times earnings following the recent slump in oil prices. This compares to almost 22 in the United States.”

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