Russia ETFs Bucking World Bank Downgrade

The World Bank sees Russia's economy growing just 1.5% in 2019 – down from 1.7% in 2018 amid risks from newly imposed western sanctions, rising inflation, lower oil prices, a weaker ruble and an expected tax increase.

"In Russia, growth has been resilient, supported by private consumption and exports," the World Bank wrote in a report published earlier this month, per the Moscow Times. "However, momentum has slowed, reflecting policy uncertainty, recent oil price declines, and renewed pressures on currency and asset prices, the bank added."

Oleg Kouzmin, chief economist at Renaissance Capital, echoed similar sentiment. "The next year will be tough. Economic growth will slow amid an increase to the value-added tax (VAT), higher inflation and lending rates," Kouzmin told Reuters.

Despite the bearish outlook surrounding Russia's economy, the country's stocks have stood out among emerging markets in early 2019. The nation's primary stock market index, the MOEX Russia Index, is up 12.95% year to date (YTD). Traders who want exposure to Russian issues should consider using one of these three exchange-traded funds (ETFs). Let's discuss three trading ideas.

iShares MSCI Russia Capped ETF (ERUS)

Launched in 2010, the iShares MSCI Russia Capped ETF (ERUS) seeks to provide similar returns to the MSCI Russia 25/50 Index. The fund's portfolio contains companies listed on Russian stock exchanges with a strong tilt toward energy firms. Its top two holdings – PJSC LUKOIL (LUKOY) and PJSC Gazprom Neft (GZPFY) – have a cumulative weighting of 31.38%. ERUS, with assets under management (AUM) of $558.97 million and offering a 4.13% dividend yield, has returned 11.88% YTD as of Feb. 11, 2019. Its expense ratio of 0.59% is moderate but above the 0.43% category average.

Although the fund is below its 52-week high, its price is currently above a nine-month trading range that formed between April and December last year. The price has recently retraced to the top of this previous range, which now acts as a significant support level. Swing traders should seek an entry point at $34 and think about booking profits on a move up to the $37 area, where the price may encounter resistance from the January and February 2018 swing highs. Consider positioning a stop-loss order below the 50-day simple moving average (SMA).

Chart depicting the share price of the iShares MSCI Russia Capped ETF (ERUS)

VanEck Vectors Russia Small-Cap ETF (RSXJ)

With net assets of $35.17 million, the VanEck Vectors Russia Small-Cap ETF (RSXJ) aims to track the price and yield performance of the MVIS Russia Small-Cap Index. The ETF's benchmark consists of companies that generate at least 50% of revenue in Russia, regardless of their geographic location. RSXJ's basket holds 26 small-cap securities with a focus on industrial and financial stocks. Average volume of roughly 7,000 shares and a 0.64% spread makes the fund more suited to swing trading rather than day trading. As of Feb. 11, 2019, RSXJ has returned a healthy 14.69% on the year and pays a dividend yield of nearly 4%. The ETF's 0.76% management fee is reasonable for a difficult-to-cover market.

The fund's share price slumped roughly 34% between April and December but has staged a V-shaped recovery in the first month and a half of 2019. The price has broken above a resistance area at $31 and sits just below the 200-day SMA. Aggressive traders could play the breakout and look to exit on a momentum move up to the next resistance level at $34. Alternatively, more conservative traders may wait for a pullback to $30, where the price finds support from a trendline connecting several reactionary swing points, before entering. Consider using a one-point stop to protect trading capital.

Chart depicting the share price of the VanEck Vectors Russia Small-Cap ETF (RSXJ) 

Direxion Daily Russia Bull 3X ETF (RUSL)

Created in 2011 and yielding 1.66%, the Direxion Daily Russia Bull 3X ETF (RUSL) attempts to return three times the daily investment results of the MVIS Russia Index. The fund's use of leverage makes it a suitable instrument for those who want an aggressive bet on Russian stocks. RUSL's 1.28% expense ratio is high, but as the fund is only intended for short holding periods, it shouldn't overly affect traders' bottom line. Almost $5 million in average dollar volume takes place per day that provides reasonable liquidity for entering and exiting positions with minimal slippage. As of Feb. 11, 2019, the ETF is up 35.79% YTD, although returns get exposed to compounding effects due to the daily rebalancing of leverage.

RUSL shares broke above an extended descending channel and the 200-day SMA in late January that now both establish a crucial support area. Therefore, traders should consider going long if the price continues to consolidate back toward the $38 level. An initial profit target could sit near $50 to catch a retest of the July swing high, while stop orders should sit just below the 50-day SMA to close losing trades.

Chart depicting the share price of the Direxion Daily Russia Bull 3X ETF (RUSL)
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