Looking to maximise returns, I wondered if it would be better to switch my investment in Russia from mutual fund to ETF and just like Lion Global Vietnam (read here), the HSBC Russia Fund has outperformed the ETF by a decent margin over the past 5 years.

Russia has two major indexed the Rouble Denominated MOEX (previously MICEX) and the RTS which is dollar denominated. The returns on these 2 indexes have been very close but I decided to bring both in for reference. Interestingly, these indexes have given returns performed near S&P 500 over the past 5 years (US is not the only market that gives good returns). Infact, the RTS was outperforming the S&P index by a large margin before the pandemic (data from Bloomberg below)

I shortlisted 3 USD denominated ETF’s for this comparison – iShares MSCi Russia (ERUS), Vaneck Vectors Russia ETF (RSX) and Vaneck Vectors Small Cap ETF (RSXJ). These are all USD denominated and have performed better than the other ETF’s.

Comparing these to the HSBC Global Russia Fund showed that the fund outperformed the closest etf by roughly 18% over 5 years – Russia Small Cap ETF (RSXJ).

Interestingly only the Russia Small Cap ETF had massively outperformed the index during the 2017/2018 period when the Russian ruble had appreciated against the US dollar.

However, the question is why Russia?

Russia Valuation’s are attractive

Russia is the 11th largest economy currently, some would rank it 6th on the purchasing power parity scale and the Index trades at an approximate PE of 14.5 which leaves room for at-least 20% on the upside. Major components of the index are state oil companies and Yandex which is a technology play. With the world slowly learning to live with the Covid virus and opening up the demand for oil would go up. So technology and oil, the 2 fuel’s of economy, are what you get exposure to by investing in the Russian markets. Not to forget, it provides for some geographical diversification as well. There is also a chance of Ruble strengthening against the USD on general dollar weakness trend which most analysts are predicting (I don’t think dollar will weaken in a big way)

However, investing in Russia comes with risks. Political risks are number one concern – the Russian markets can fall sharply if there is an escalation in US – Russia tensions; a new wave of Covid or growing protests against President Putin can also cause a fall. The Russian market, specially RTS, did fall spectacularly in March, giving up close to 80% of the past 4 years gains when oil prices fell and pandemic had started to take hold.

On the upside, the President Putin could open up the Russian markets just that tiny bit to give western countries access to market and prevent them from imposing trade sanctions.

So I am going to diversify with the HSBC fund to invest in Russia though allocating some amount to the Russia small cap etf can bolster overall returns.

For readers, do your own due diligence while making any investments to be financially safe and don’t forget to mask up, no matter where you read this from. Let’s all do our part in keeping our loved one’s safe and be responsible towards society in general.