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Russia, in Thrall to Commodities, Has a Bright Spot

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News for the emerging markets, including Russia, wasn’t good in 2013, and it is only getting worse in 2014 — with the exception of the hype over the Sochi 2014 Olympics.

Russia’s economy grew just 1.3% last year, according to preliminary estimates, and China’s expanded by less than 8% for the first time in 20 years. Of course, their currencies have been taking a beating. The Russian ruble, for instance, hit a five-year low against both the dollar and euro.

No wonder 54% of investors surveyed late last year by Morgan Stanley said they saw Russia as a “bad” place to invest. But are there any bright spots when it comes to investments with a Russian focus?

Overall, the iShares MSCI Emerging Markets ETF (EEM) took quite a beating over the past 12 months, dropping 12% vs. a nearly 18% in S&P 500 (SPY) during the same period. Year to date, EEM is down 8%, while the S&P has weakened just 4%.

The SPDR E&P Russia ETF (RBL) has underperformed EEM, dropping 15% over the past 12 months and 10% since the start of the year.

Rich in natural resources, Russia’s economy is commodity based, with most exports tied to oil, natural gas, metals and timber.

Commodities have outperformed overall Russia and emerging-market funds, but their returns are far from stellar.

As measured by the iPath S&P GSCI Total Return Index ETN (GSP), global commodities have weakened 2% year to date and are off 8% over the past 12 months. Meanwhile, the S&P International Energy Sector ETF (IPW) is down 5% so far in 2014 and has traded flat sicne early February 2013.

The iShares S&P Global Timber & Forestry Index Fund (WOOD), however, is up 9% since early February of 2013, though it’s down 3% for the past year.

These results put timber ahead of the broader performance of commodities in the short term. The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL), for instance, is down 8% year to date and has a flat 12-month performance.

Precious metals aren’t doing quite as well as timber in 2014, but they are in positive territory. The iPath Dow Jones-UBS Precious Metals Subindex Total Return ETN (JJP) is up 4% year to date but down 30% since February 2013.

The iPath Dow Jones-UBS Industrial Metals Subindex Total Return ETN (JJM), though, has weakened 5% in early 2014. It’s also off 19% on a 12-month basis.

There is one sector critical to Russia that is shining and has done so consistently since early 2013: natural gas.

The iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (GAZ) has soared 25% year to date. Its 6-month returns are 40%, while its 12-month performance is a positive 20%.

And the US Natural Gas ETF (UNG), which also reflects changes in futures, has moved up 25% in early 2014, 45% in the past six months and 35% over the past 12 months.

Like Russian investments overall, however, natural gas is a volatile sector. Over the past two years, the S&P has moved up steadily with 30%-plus returns vs. a 20% zig-zag movement of UNG and a loss of 10% for GAZ.

Like an Olympic skier at the games, investors will have to ask themselves if the thrill such gas-themed holdings is worth the bumpy ride.