New York-based asset manager Van Eck Global has launched Market Vectors Russia Small-Cap ETF (NYSE Arca: RSXJ), the first US-based exchange-traded fund (ETF) designed to give investors pure-play exposure to the developing local Russian economy as measured by the country’s small-capitalisation companies.
Russia is currently among the least expensive of the major emerging markets from a valuation perspective. Russia’s stock market price/earnings ratio is just 6.6 times, which represents a significant discount versus emerging markets stocks in general. Recently, its economy has been boosted by strong commodity prices, with Gross Domestic Product (GDP) expected to expand by 4.3 per cent in 2011.
Before today’s launch of RSXJ, US-listed Russia ETFs had focused primarily on large-cap companies; companies in the underlying index for the Market Vectors Russia ETF (NYSE Arca: RSX), for example, have an average market capitalisation of $20.3 billion. Companies included in these large-cap focused indexes are generally global enterprises with significant exposure to sectors of the economy deemed strategic by the Russian government, particularly energy. This may make large-cap Russia exposure appealing as a commodity or energy component of a portfolio, but leaves the domestic Russian consumer story largely untouched.
“We are strong believers in Russia and many other emerging markets and think that large-cap exposure definitely has its place. However, we also believe the best way to gain pure-play exposure to a country’s domestic economy is through smaller companies that derive their revenue primarily from doing business locally,” said Ed Kuczma, Emerging Markets Analyst with Van Eck Global. “Other potential advantages with small caps generally include less political interference, relatively better corporate governance practices, and relatively better protection for minority shareholder interests.”