Analyse: Lyxor ETF Russia A

For tactical purposes, this ETF is most suitable for investors either with a bullish view on oil--and energy prices in general--given the benchmark’s high correlation (0.72) to oil over the last five years or for investors believing that Russian stocks are generally undervalued.

Fundamentale Analyse

Russian equities continue to trade at a discount compared to other emerging markets. This persistent discount can be partly explained by rampant corruption and state interference within Russia. These are key risk factors for Russian companies; hence investors demand higher risk premiums. The government’s share in the Russian economy is estimated at about 50%. However, Russia is pushing privatisation forward as the government has started to remove state officials from the boards of some national companies and has pared its stakes in a few corporations as well. Nevertheless, allegations of fraud at the parliamentary election in December last year increased political tension in Russia. The Opposition organised the largest antigovernment demonstration in two decades with further demonstrations expected in the run-up of the coming presidential election.

The Russian economy is heavily dependent on energy prices as about half of Russia’s annual income comes from oil and gas revenues. In fact, it is estimated that the nation’s budget is only balanced if the oil price is around $115 per barrel. Over the last decade, oil revenues have been used to fund increases in social spending, helping many pensioners and state employees to escape poverty.

Moreover, the country is suffering from huge net capital outflows. Russia’s central bank forecast net capital outflows of $70bn for 2011. During the first three quarters of the year, $49.4bn in private capital was moved out of the country. This compares to $14.3bn in the same period of 2010. Investors have grown increasingly concerned about the slow economic recovery and an uncertain political landscape. This has not only put increasing pressure on the Ruble but has also harmed the government’s efforts to attract foreign direct investment to a country that already suffers from a lack of investor confidence.

Also, the central bank recently announced plans to widen the trading band of the Ruble against a USD/Euro basket in response to the ongoing sovereign crisis in the eurozone, geopolitical risk in the Middle East and domestic political tension.

Nevertheless, Russia sits on one of the world’s largest foreign-exchange reserves ($510.9bn in December 2011) and has one of the lowest public debt burdens amongst the world’s top economies. In 2010, Russia’s debt-to-GDP ratio was only 9.5% compared to 97% and 78.8% for the US and Germany, respectively. This is particularly impressive given the fiscal shock experienced during the Russian crisis in the 1990s, which left Russia with a debt-to-GDP ratio of 97% in 1999. The country’s capital cushion gives the government greater latitude and leaves room for further stimulus packages, if needed. Moreover, hosting the World Cup 2018 will require massive investments in infrastructure and should therefore have a long-lasting, positive effect on the Russian economy.

However, corruption remains one of the biggest risks for investors in Russia and in conjunction with bureaucracy and state interference will likely continue to scare off some foreign investors.

Indexkonstruktion

The Dow Jones Russia Titans 10 USD index tracks the performance of the ten largest and most liquid Russian depositary receipts trading on the London Stock Exchange. The securities are ranked by both their size and liquidity, and are selected for inclusion based on a combination of those two factors. The DJ Russia Titans 10 is a float-adjusted market capitalisation weighted index, with a 15% cap applied to any one component in order to ensure diversification. The index is rebalanced quarterly. Only large Russian companies will tend to list depositary receipts on the London Stock Exchange. As of this writing, the components’ market capitalisations range in size from $2 to $40 billion. Also, given Russia’s abundant natural resources, the country’s economy--and consequently the index--is heavily tilted towards the resource extraction industry, and particularly oil and gas companies. The oil and gas sector accounts for nearly three-quarters of the index's weight. Steel production and mining account for nearly another quarter of the index, leaving only a few percentage points in exposure to banking.

Fondskonstruktion

This ETF uses swap-based replication to track the performance of the Dow Jones Russia Titans 10 index. Instead of holding the actual index securities as in a physically-replicated ETF, the fund holds a substitute basket of securities which may or may not resemble the index. In this case, the substitute basket is composed of European equities. Lyxor then enters into an OTC swap in which it exchanges the performance of this basket for the benchmark’s return. While Lyxor must solicit third-party bids for its swaps, which is always Société Générale, Lyxor’s parent bank. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, Lyxor is now committed to target zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. Lyxor does not currently engage in securities lending, which helps to minimise overall counterparty risk.

Gebühren

The fund levies a total expense ratio of 0.65%. This falls at the lower end of the range for ETFs tracking Russian equities.

Alternativen

As of this writing, there are a few ETFs tracking Russian equities. EasyETF also offers an ETF tracking the DJ Russia Titans 10 index at a TER of 0.55%.

The RDX index, tracked by Source, is similar to the DJ Russia Titans 10 in that it comprises Russian depositary receipts trading on the London Stock Exchange. However, it has 16 constituents and is less concentrated in the oil & gas sector (about 60% exposure to the sector, versus about 70%). Source’s ETF uses synthetic replication and levies a TER of 0.65%.

In addition, there are a few ETFs tracking the performance of capped variations of the MSCI Russia index. The largest in terms of total assets under management is the one from db x-trackers (25% cap on individual constituents), using synthetic replication and levies a TER of 0.65%. The other one is the one from ComStage (30% cap), also using synthetic replication with a TER of 0.60%. With 27 components, the base index is similar exposed to the oil & gas sector.

Moreover, HSBC recently launched its HSBC MSCI Russia Capped Index. The fund uses physical replication to track its Russian equity benchmark. This makes it unique amongst those ETFs tracking this particular index, the remainder of which all use swap-based replication. The fund levies a total expense ratio (TER) of 0.60% and is denominated in U.S. dollars.