ETF Teardown: Top Emerging-Market Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. If investors want to capitalize on the rapid growth in emerging markets, they can buy shares in iShares MSCI Emerging Markets Index Fund (NYSE:EEM), with top holdings including Taiwan Semiconductor and China Mobile (NYSE:CHL). But because this ETF invests in a number of stocks, its broad diversity also limits your upside.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments across emerging markets like Russia. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors locate great stocks quickly, CAPS-rated stocks are tagged with descriptors that group the company with others in the same category -- "Natural Gas," for example, or "Cleaning Products."

Selecting the "Russia" label in CAPS gives you a list of 11 investments that are tied to the planet's largest country (geographically speaking). This collection has absolutely pummeled the broader market in the past year, up a massive 70%, while the S&P 500 has ticked down by nearly 6%.

To gauge which companies the CAPS community thinks offer good opportunities in this particular region, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a couple of the companies to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some Russian-tagged stocks I've pulled from CAPS today:

From Russia with love
No doubt about it -- CAPS investors love Russian companies. All of the above Russian stocks pull in the highest possible five-star rank from our community, with the list divided among two main industries -- basic commodities and communication services.

Having passed Saudi Arabia as the world's biggest oil producer, Russia hosts several massive energy companies that are tapping expansive yet still not fully revealed reserves. And though regulatory authorities have a bad habit of mucking with oil drillers' operations, the political risk in Russia hasn't been enough to keep Pink Sheet-listed Lukoil off the list of highly favored stocks in the CAPS community. (In this case, being on the Pink Sheets is not a bad thing.)

While most companies on our list are based in Russia, Luxemburg-based ArcelorMittal derives a good portion of its revenue from operations in the Commonwealth of Independent States (CIS). But the world's largest steel producer has had recent issues with production from its Asia, Africa, and CIS segment, and it's forecast "comparable" operating performance for the coming year. Still, 711 of the 739 CAPS investors rating the company believe it will outpace the broader market in the future, since its diversification gives it the strength to deal with any localized issues.

Answering the call
Russia's telecommunications sector -- and wireless services in particular -- has profusely rewarded investors for years, as demand for mobile services continues to grow rapidly. Shares of both Mobile Telesystems and VimpelCom have increased severalfold over the past five years, with each company grabbing leading market shares in Russia and surrounding CIS nations such as Kazakhstan and Ukraine.

To continue its path of big growth in smaller, emerging countries, VimpelCom recently acquired fixed-line communication-services provider Golden Telecom. The nearly pure-play wireless company will now work to integrate offerings from both companies, aiming to provide Russian consumers with packages including fixed-line voice, broadband, and wireless services. Still sensing a golden opportunity in VimpelCom's future, more than 98% of the 337 CAPS All-Stars rating VimpelCom believe it will continue to beat the broader market in the future.

You can lead a horse to water ...
Plucking individual stocks from any emerging market is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies.

So, do you agree that the upside in Russian energy outweighs the risks? Or are communications companies a better investment? Give your opinion in Motley Fool CAPS.