Investing in what was once our bitter enemy is not an easy strategy for many investors to come to grips with. However, by ignoring the booming growth in the old USSR, investors are missing out on what could be a very lucrative investment opportunity. Since 2005, the Russian Trading System Index (RTSI) has risen three-fold to hit a new all-time high in April.

Along with the extraordinary gains comes an equal amount of above-average risk. But, if you are an investor looking for growth and don't think the United States is not the place to find it, Russia should be high on your list. One sign of growth in an emerging country is how quickly a middle class can be formed. According to the UN, half of all Russians will be categorized in the middle class by 2011.

Russian ETF
In late April, Van Eck launched the Market Vectors Russia ETF (NYSE: RSX), giving investors an opportunity to gain exposure to the volatile country. This exchange-traded fund (ETF) is composed of 30 Russian stocks that must meet a number of strict requirements. First, they must be based in Russia and trade on a global exchange. The stocks must also have a minimum market cap of $150 million and a daily average turnover of at least $1 million.

Considering there are only 30 stocks in the ETF, and that the top-five make up 40% of the allocation, the concentration risk is above average. This is even more evident in the sector breakdown, where the oil and gas industry makes up 41%, followed by telecom at 18%. Russia is considered one of the world leaders in the energy arena; however, investors should realize the high amount of exposure tied to the price of oil and natural gas when buying RSX.

The expense ratio is a reasonable 0.69% based on the exposure RSX gives investors to stocks only traded in Russia. None of the top five holdings are traded on a U.S. stock exchange; therefore it is difficult, if not impossible, for the average investor to invest directly in the stocks.

If past performance is any indication of future performance, RSX would be an ETF we all want in our portfolio. Based on back-tested hypothetical data, the average three-year return is 40.3% and the five-year return is 48.3%. Even thought the beta is listed as 1.36, the volatility will likely be much higher, and only investors willing to take above average risk should consider RSX as a viable investment option. (For more on this subject, see Finding Fortune In Foreign ETFs.)

Investing in the Rising Middle Class
There are, of course, a handful of individual Russian companies that trade on the U.S. exchanges as ADRs. In 1996 Vimpel Communications (NYSE: VIP) became the first Russian company traded on the New York Stock Exchange. The company is a leading mobile-phone service provider in the country under the Beeline brand name. At the end of 2006 the company had over 55 million subscribers in Russia and surrounding countries. Due to the company's cellular-license portfolio the coverage represents 94% of Russia's population. Therefore, sustained high levels of growth can continue for years.

Golden Telecom (Nasdaq: GLDN) offers voice, data, and internet services to individuals as well as corporations in major cities using its metropolitan overlay networks. One of its largest corporate cellular customers is Vimple. Similar to Vimple, Golden Telecom also operates in the growing countries that surround Russia, such as the Ukraine. As the middle class continues to expand in Russia, both companies are positioned to take advantage of the move into the technology age.

There are several factors that must be considered before investing in Russia. The most important factor is the risk and volatility involved with an emerging country such as Russia. The second factor is timing. Investments in Russia can swing 10% to 20% in a couple of month's time, and therefore, using the volatility to your advantage can be lucrative.

Patiently waiting for the Russian stock market and the related investments to fall to an appropriate entry level is the first step to making money in the old USSR.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
Trading Center