Leveraging Bulls and Bears in Russia

Russia is a country of rich natural resources and a well educated population, but many investors are afraid of it. In the long term, those investors are often right. Russia has gone from strength (a successful hosting of the 2014 Winter Olympics) to show of strength (the invasion of Crimea) to self-injury (a ban on food imports which may drive up Russian consumer prices 2% this year). But investing in a way that is counter-cyclical to other investors’ fears can bring great profits, particularly when investing through a triple-leveraged fund such as the Direxion Daily Russia Bull 3x Shares (RUSL) or the Direxion Daily Russia Bear 3x Shares (RUSS).

RUSL, the bull exchange-traded fund (ETF), seeks daily investment results, before fees and expenses, of 300% of the performance of an index of publicly traded companies that are listed on an exchange in Russia or which generate at least 50% of their revenues in Russia.

RUSS, the bear ETF, attempts to generate results which are 300% of the inverse performance of the same index. It does this primarily through financial positions which allow it to short assets in the index.

RUSL has lost 45.03% this year, but it has gained 14.67% since the start of August. Because these funds are designed for daily returns, their long-term trend is not necessarily a real concern for investors. RUSS has lost 1.69% this year and 15.75% since August began. As leveraged ETFs, neither of these funds distributes dividends.

The composition of both funds changes daily, using financial instruments which target the performance of the relevant index. The index is non-diversified, with the largest holdings in energy, 41.47%; materials, 16.13%; telecommunications, 12.43%; and financials, 11.69%. It also has additional holdings in consumer staples, information technology, utilities, industrials, consumer discretionary and healthcare. The top 10 holdings in the index make up 15.48% of its assets. The largest holdings are Gazprom OAO, 8.28%; AK Transneft OAO, 2.09%; Eurasia Drilling Co Ltd, 1.78%; Globaltrans Investment PLC, 0.74%; and E.ON Russia JSC, 0.52%.

Long-term investment should be based on a consideration of the fundamentals and business prospects of a specific company, country, industry or sector. Short-term trading is much more dependent on your ability to react rationally to Mr. Market’s mood swings. Investing in a leveraged fund, such as Direxion Daily Russia Bull 3x Shares (RUSL) or Direxion Daily Russia Bear 3x Shares (RUSS), greatly amplifies the potential reward.

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In case you missed it, I encourage you to read my article from last week about the contrarian Russian small-cap ETF. I also invite you to share your thoughts below.