For investors with a high risk tolerance, the VanEck Russia ETF (RSX) presents an interesting risk-reward opportunity.
The exchange-traded fund's price has plummeted as a result of escalating tensions between Russia and the West surrounding Russia's positioning of troops on its border with Ukraine. The opportunity might be there for investors willing to take famed investor Warren Buffett's suggestion to "... be greedy when others are fearful" to heart.
Let's look at three reasons why this Russian commodity-focused ETF can be a lucrative investment for risk-tolerant investors.
Natural resources: A great sector for today and tomorrow
Russia is a vast country with a wealth of natural resources, and the holdings of VanEck Russia ETF (better known as RSX) reflect this. Outside of Sberbank of Russia (SBRCY), Russia's largest bank, other top holdings include oil and gas giants like Gazprom PJSC (OGZPY) and PJSC Lukoil (LUKOY); mining giants like Norilisk Nickel (NILSY) and Polymetal International (POLY); and even agricultural and fertilizer companies like PJSC PhosAgro (OTC: PHOJY). In an inflationary environment where the prices of commodities ranging from oil and natural gas to lumber and fertilizer are rising, these are good sectors to have exposure to in order to profit from the price inflation as well as protect yourself from it. Oil prices have been surging past $90 a barrel as oil demand continues to grow, while supply has been constrained by years of underinvestment worldwide. An ETF like RSX gives you exposure to some of the world's biggest oil companies like Gazprom and Lukoil.
While some investors don't like the idea of investing in oil companies or mining companies due to environmental concerns, it is important to point out that metals like silver, nickel, and cobalt are going to be crucial to furthering the transition toward electrification. Investors who see electric vehicles (EVs) as the future should consider Norilisk Nickel; nickel is an important part of the batteries used in EVs. Even investors who believe that the world should stop using fossil fuels should recognize the fact that natural gas is a cleaner bridge fuel that can help the world transition from the current energy grid to the future of energy. Gazprom is the largest supplier of natural gas to Europe.
RSX contains a great assortment of the companies that benefit from today's inflation of natural resource prices but also will be important players in the energy transition over the long term.
The stock price drop is pushing RSX's dividend yield much higher
In a low-yield environment where U.S. consumer staples stocks are yielding an average of 2%, and dividend stalwarts like AT&T have instituted changes that slashed their dividend, RSX's 6.6% dividend yield stands out. Part of that elevated yield is coming from the drop in share prices (it's down about 30% from 52-week highs). But then there's also the fact that Sberbank and Lukoil, stocks that make the list of RSX's top holdings, feature yields of 14% and 10%, respectively, which also contributes to RSX's ability to offer a juicy payout. Also, Russia has higher interest rates than the United States and many other Western countries, meaning that companies there pay out higher dividends to be more competitive with bonds and other fixed-income instruments. Furthermore, the Russian government's policy is to push companies to pay out half their profits in dividends. All this has created some really attractive income characteristics for investors.
Russian equities were already trading at a discount to their Western peers, but the recent sell-off has created some bargain-bin valuations for enterprising investors. While the average price-to-earnings (P/E) multiple for the S&P 500, for example, is about 25.2, many of RSX's largest holdings are trading at 5 to 7 times earnings. Obviously, a discount is warranted due to the risks, but trading at such low valuations also gives investors some assurances that the price may be bottoming out.
Is RSX a Buy?
Every investor must think about their own risk tolerance and situation, and RSX is obviously among the riskier investments out there given the uncertainty over the rapidly developing political situation involving Russia and Ukraine. If there's war, expect the price to drop further. However, for risk-tolerant investors with a long-term investing mindset, RSX has the makings of a compelling risk-reward play. It has outsized exposure to natural resources, a generous dividend yield, and some strikingly low valuations for its underlying holdings.
I am currently a holder of RSX and view it as an attractive investment over the long term. The stock has already bounced over 10% off of the lows it hit in mid-January, indicating that other investors are starting to believe that the risk has been priced into RSX and it's heading back up.