Betting On Red: Building A Russian ETF Portfolio

February 15, 2017

Depositary Receipts vs. Local Shares

The ERUS portfolio gets even more interesting when we look at its underlying securities. The biggest difference between ERUS and RSX is that Gazprom appears twice in ERUS, and just once in RSX. You’ll also notice Lukoil is in ERUS, but absent from RSX.

 

ERUS   RSX  
GAZPROM OAO 10.5% SBERBANK-SPONSORED ADR 8.4%
LUKOIL OAO 9.7% GAZPROM OAO-SPON ADR 7.7%
SBERBANK-SPONSORED ADR 7.2% OIL COMPANY LUKOIL PJSC SPONSORED ADR 7.1%
GAZPROM OAO-SPON ADR 5.4% NOVATEK OAO-SPONS GDR REG S 5.7%
TATNEFT-CLS 4.6% MAGNIT OJSC-SPON GDR REGS 5.3%
NOVATEK OAO-SPONS GDR REG S 4.4% ROSNEFT OJSC-REG S GDR 5.0%
MMC NORILSK NICKEL OJSC 4.0% TATNEFT PJSC SPONSORED ADR 4.8%
ALROSA AO 3.8% PUBLIC JOINT STOCK COMPANY MINING 4.7%
MAGNIT OJSC-SPON GDR REGS 3.7% VTB BANK OJSC-GDR-REG S 4.5%
MOBILE TELESYSTEMS-SP ADR 3.5% AK TRANSNEFT OAO-PREF 4.4%

 

The reason is that RSX is constructed using U.S.-listed global depositary receipts and American depositary receipts that contain Russian companies, whereas ERUS gets its exposure using ordinary shares that are exclusively listed locally in Russia. Local shares don’t necessarily lessen ERUS’ concentration, but the concentration in ERUS focused on locally listed firms helps minimize the extent to which ERUS is not being influenced by developments outside of Russia and in the rest of the ETF markets.

How To Invest In Russia

That said, I want to isolate some of these key fundamental parameters we’ve looked at to create a portfolio that, for long-term strategic holders, could be a great way to get exposure to Russia.

Here’s what we arrived at to achieve what we consider to be optimal Russia exposure:

  • 40% position in RSX
  • 30% holding in the small-cap ETF RSXJ
  • to get exposure to those ordinary Russia-listed shares, a 30% stake in ERUS

 

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