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Invest in Russian ETFs Now?

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Last week, Twitter stock was up 25% after announcing some very impressive quarterly earnings. I had been buying Twitter since the start of May. Thanks to the awesome power of dollar cost averaging, I was about break-even on the day before the earnings announcement. I sold 40% of my shares covering almost 70% of my original investment, leaving me with 60% of the shares at 30% of the price.

In gambling terms this would be called "playing with the house money", except that some of it is still my money.

This leaves me with a good problem... cash on the sidelines. I can't convince myself that having cash doing nothing is a good thing. I try to rationalize it by saying, "Cash is king" and "The market valuations are simply too high right now." While, I believe both of those things, I have a belief that there should be always a good way to use cash. In this case, the cash is in a retirement brokerage account, so my options are limited to the securities markets.

I've never been a big fan of bonds, they've never felt like a good fit for my aggressive investing style and relatively young age. So that typically leaves me looking for the best stock opportunity out there. One thing I should note, is that this is a small allocation of my overall portfolio that dedicate to active investing... the overwhelming majority of my money is in very broad-based ETFs. So with this money, I'm looking for a bargain. The approach has been worked for me, but of course I'm aided by a strong macro-economic environment.

Because of that strong macro-economic environment, I don't see many stocks that I'd consider a bargain. I decided to use an ETF screener to see what has lost money in the past year. ETFs that were invested in Russian have been some of the biggest losers. I'm guilty of not always following current events, but it's even obvious to me that there are a ton of political issues there.

It got me thinking, "Are things likely to get worse or better? Is Russia going away anytime soon?" Many countries have their ups and downs. Greece notably was in a terrible financial situation a couple of years ago. The GREK Greece ETF has performed really well over the last couple of years.

When I look at the Market Vector Russia ETF Trust (NYSEARCA:RSX), I see it as near its 5 year low. I think to myself, "This clearly is a downtime for the country. At some point, it seems reasonable that they will resolve the conflicts and the dark cloud that has followed them will go away." If this is true, the economy should recover and I'll be able to sell at a nice gain.

I talked with a friend who follows all the markets and she made a great point that some economic sanctions have just begun. It might take awhile for them to filter through and the results be seen. In fact, an article a couple of days ago pointed out that some of the Russian ETFs are looking to drop some of their holdings that might be largely affected by the sanctions.

In some ways it is really risky, but in other ways, a whole country's ETF should carry a lot less volatility and risk than my previous Twitter investment. Let me know what you think in the comments.

Last updated on August 5, 2014.

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9 Responses to “Invest in Russian ETFs Now?”

  1. tom says:

    Sounds like market timing to me…

    The sanctions + no growth in GDP at all + the instability of the people in charge (Putin) makes it extremely risky. You’d probably have to hold on to those ETFs for a very long time to see a substantial return.

    That’s just my thought.

  2. The valuation on Russian stocks are insanely low. I actually dipped my toes into Gazprom in June 2013 and March 2014. The stock is selling for 2 – 3 times earnings, and has a decent yield. I mean, you want to buy when there is blood on the streets. Of course, sanctions could make your investment lose a lot of money, particularly if US and European investors are “banned” from owning Russian equities and/or bonds. I doubt it would get there, so if you are willing to wait this out for say 10 years, you might be pleasantly surprised. In the event things don’t work out as well, you are at least paid to wait in the form of a high dividend. If things get really bad, make sure to at least put the money in a taxable account, so you can at least get some credits come tax time.

    Of course Gazprom is 0.60% of my networth. It is play money for me – roughly 2 – 3 months worth of annual dividend income I earn from my portfolio.

    • Lazy Man says:

      It may sound crazy, but I don’t have a taxable brokerage account now. Between SEP-IRAs and Roth IRAs, it doesn’t make much sense for me to do so. I’m hoping that an index fund diversifies me, because investing in an individual Russian stock is way too risky for me.

  3. Well yes, you are diversified with an index fund. However, what happens if that whole index vaporizes (for example – nationalisation)? Hence the need for a way to reclaim losses on taxes. Of course, if RSX returns to normal valuations, you can make a lot of money, much more than sticking it in an S&P 500 index fund.

    RSX is not US stocks in my humble opinion, which you can hold through thick and thin for 30 years, and have a positive expectancy of a decent profit at the very least. Things can happen.

    As for SEP IRA… I forgot what your job situation was.. But can’t you do a solo-401k? I think you have defer more that way than with the SEP IRA.

    • Lazy Man says:

      I have to admit that I don’t know anything about nationalisation. I presume that the ETFs, traded on the US stock markets, would still pay out to holders of the ETFs. I tend to think there would be an issue if Vanguard, for example, shut down VTI. I don’t see how it would be too different if it was a difficult ETF company holding a different country’s stock. However, as I said, I don’t really know.

      Sure, no one is comparing RSX with US stocks, but I don’t see Russia disappearing at any point. It might be called Mussia or Crussia, but I think if you were buying at an insanely cheap valuation (such as now), you’d see it go up at some point well within the next 30 years.

      I can do more with a 401K and I do have one of those set-up. It’s just that I haven’t gotten to the point of having that “more” money to invest. I prefer the SEP-IRA as it is more straight-forward. The Fidelity is a Keough and just carries more confusion that I prefer not to use unless there’s some advantage to.

  4. Hi Lazy,

    Russia would still be there in 100 years. But, Russia was also there between 1917 and 1990, yet anyone who bought Russian stocks or bonds prior to 1917 got wiped out. Cuba has also been around for decades, yet anyone who has owned Cuban stocks likely got wiped out in 1959.

    You know Russia will be there in 100 years, but you also want to make sure that you will be in a position to profit from the ingenuity of its people. I am not saying Russia is not a good investment, I am just laying out one of the risks to this investment, which is potentially why Russia is so cheap today.

    • Lazy Man says:

      I tend to think the financial markets globally have matured a bit since 1917 and 1959. I mean I don’t even think the iPhone was around back then (j/k obviously).

      I’m tempted to say this time it is different, which can be seen as a trap. Still, if the most recent examples are more than 60 years ago, and it’s happened twice in 100 years globally, I’m putting that risk in with Microsoft being the next Enron… possible, but probably too small to consider.

  5. […] invest in it, you are at my mercy. Imagine how you will feel when I rebalance the portfolio to be 99% invested in a Russian ETF. Cue […]

  6. […] page where they say you should trim down on Russian stocks. I clearly got that wrong when I wrote "Invest in Russian ETFs Now?" On the positive side, the Russian ETFs are even cheaper […]

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