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Is the Russia ETF in Trouble?

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While many equities have had a solid start to 2013, it hasn’t universally been the case across the globe. In fact, several key emerging market ETFs have had a rough time so far this year, including the Russia ETF (RSX - Free Report) .

This fund has stumbled by double digits on the year, underperforming SPY by about 2,000 basis points in the time frame. Furthermore, this trend continues the sluggish performance for the ETF in the post-recession environment, as RSX has lost about a third of its value in the trailing two years.

Clearly, underperformance in Russian ETFs is nothing new, especially considering the lackluster performance of energy products, the key exports of Russia, during the time frame. Yet, in 2013 oil and natural gas prices, as represented by (BNO - Free Report) , (USO - Free Report) , and (UNG - Free Report) , have held surprisingly firm, suggesting that this isn’t what is behind RSX’s latest slump (see Will There Be a WTO Boost for Russia ETFs?).

Behind the Slumping Russia ETFs

Instead, different factors have played a big role in Russian ETF uncertainty. Chief among these are the strong dollar—which hurts ruble denominated assets—as the Russian currency has lost about 3% YTD against the greenback.

Beyond that though, geopolitical concerns are also having a minor impact on the outlook for Russia as well. In particular, concerns over Cyprus and its banking system—thanks to the heavy influence of Russian depositors on the country—have impacted Russian stocks negatively in the past few days.

These factors have combined with fresh worries over Gazprom to dull the appeal of Russian ETFs and stocks in the near term. After all, Gazprom is the second biggest holding in RSX at 8% of total assets, so recent news out of the company should be viewed as troubling (read Crude Oil ETF Investing 101).

Gazprom in Focus

Gazprom recently saw its value decline below $100 billion for the first time since 2009 on concerns over the company’s management. According to Bloomberg, shares of the firm has lost about a third of their value on rising expenses, declining profits, and lower-than-forecast dividends.  

“Gazprom’s dividends disappointed -- that was just the latest blow to investors -- and there are risks their contracts will be revised and prices lowered spurring further declines in net profit,” Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp. said to Bloomberg.“There is hope that the company’s management will be replaced, this is the only thing that would be able to turn the stock around.”

Given how important Gazprom is to RSX’s holdings profile, it will be hard for the other holdings to make up for this bearishness. This is particularly true with the current concentration in the ETF, as energy stocks account for 40% of the profile while basic materials make up another 18%.

So, much of the fund will be highly-tied to basic materials/energy outlooks, and with such a big and important part of the ETF struggling, it is hard to get too bullish on RSX at this time. This is even more apparent when investors look at RSX from a technical perspective (read A Technical Look at the Gold ETF).

RSX Chart


As you can see in the chart above, RSX is very weak from a technical look. The fund recently saw its short-term average break below its longer term one, suggesting bearishness.

This represents a huge reversal for the fund, and could suggest that a new trend is underway. A new path for RSX is further confirmed by the large amount of bearish volume as of late, implying a high level of interest in selling.

Bottom Line

A number of events suggest that Russian ETFs are headed for more weakness. Fundamentals are uncertain, the dollar is strong, while the ETF is also weak from a technical perspective.

For these reasons, we currently have a Zacks ETF Rank of 4 or ‘Sell’ on RSX, meaning that we are looking for more underperformance in this ETF over the next 12 months. Should recent trends be any guide, this could definitely be the case, suggesting that this fund should definitely be an 'avoid' for the time being.

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