Russian Roulette for Your Portfolio?

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The World Bank estimates that the Russian economy grew at an 8% annual pace in 2007 and so far in 2008. Russia has a vibrant economy which has been buoyed by its vast energy, mineral, and timber reserves, making it an attractive place for investors.

For those willing to take on the risk of a single country fund, the Market Vectors Russia Fund (NYSE: RSX  ) is an ETF that provides easy access to the world's largest country in terms of area. But tread carefully, as you might be playing Russian roulette with any exposure to this market, which will be heavily influenced by political events and commodity prices.

Fund facts

  • Inception date: April 24, 2007
  • Expense ratio: 0.69%
  • Net assets: $1.2 billion

Fund specifics
The Russia ETF tracks the DAX Global Russia Index, which includes many publicly traded Russian companies. Although a few, such as Vimpel-Communications (NYSE: VIP  ) , Mechel OAO (NYSE: MTL  ) , and Rostelecom (NYSE: ROS  ) trade on U.S. exchanges, many of the fund's holdings aren't easily available to U.S. investors.

With roughly 40% of the fund invested in the oil and gas sector, and 22% devoted to the iron and steel sector, the Russia ETF is heavily influenced by movements in the energy and commodity markets.

Portfolio fit?
The global commodities boom has proven beneficial to resource rich Russia, which a decade ago was an economic basket case. Russia has solidified its political leverage due to its position as a major supplier of energy to Europe and has demonstrated a willingness to play the energy card to project its power and influence. By flexing its military might in Georgia, Russia has shown the world that it is not afraid to move opportunistically and aggressively to promote its own self-interest. The price volatility created by the uncertainty over the Georgian conflict might be a buying opportunity for short term traders or investors looking to get in at low prices.

Further declines in energy prices are likely to pressure asset values in Russia, and a resurgent dollar and political uncertainty are potentially harmful to an investment in this country. For long-term investors exposure to Russia should be seen as speculative since the Russian economy is marked by aggressive government interference. You may not want to rush in to this fund only to get mauled by the Russian bear.

A slightly more diversified geographic approach to investing in Russia is with the SPDR S&P Emerging Europe ETF (AMEX: GUR), which has roughly 60% of its assets committed to the Russian market and the remainder invested primarily in Poland, Turkey, Hungary and the Czech Republic. Meanwhile, if you're bullish on oil and commodities, ETFs like the iShares DJ Energy Sector ETF (NYSE: IYE  ) and the PowerShares DB Commodity Index Fund (AMEX: DBC  ) are less exposed to particular geographic regions.

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Fool contributor Zoe Van Schyndel lives in the Seattle area, where she enjoys the coffee and natural wonders. She does not own any of the funds or securities mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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