Russia ETF Paying 3 Times Stocks in Slow Slide to AbyssInyoung Hwang
An exchange-traded fund designed to triple returns on Russian stocks is sliding into oblivion.
The Direxion Daily Russia Bull 3x Shares has fallen 70 percent in December. The ETF, whose ticker symbol is RUSL, is designed to magnify the daily return of an index comprising the largest and most liquid companies based in Russia or deriving 50 percent of their sales from the nation.
The ETF’s plunge underscores the vulnerability of leveraged ETFs in the event of a collapse in the indexes they track. The Market Vectors Russia Price Index, which RUSL follows, has lost 54 percent of its value this year amid a freefall in the ruble caused by the oil-price slump and international sanctions.
“With the collapse in the ruble, the market is intent on the idea that the Russian economy may crater,” Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York, said by telephone. “There isn’t much reason to be bullish on Russian equities right now.”
RUSL tumbled 35 percent yesterday. It slipped another 8.8 percent to $2.18 at 1 p.m. in New York. The Market Vectors Index consists primarily of 46 stocks listed in London, Russia and the U.S. The heaviest weightings include oil-producer Lukoil OAO, Gazprom OAO -- the world’s biggest natural-gas company -- and Nasdaq-listed Yandex NV, which owns Russia’s largest Internet search engine.
In May, BlackRock Inc.’s Laurence D. Fink, who oversees the world’s biggest exchange-traded fund lineup, said leveraged ETFs are a structural problem and have the potential to “blow up” the industry. The securities, which use swaps or derivatives, have come under scrutiny over issues including diverging from the index they’re designed to follow, and exacerbating market volatility.
In 2009, the Securities and Exchange Commission warned that the vehicles weren’t appropriate for long-term investors. The head of Direxion Investments, the ETF provider behind RUSL, said in 2010 that most investors should avoid such leveraged products.
“They’re good for trading but they’re inherently flawed products,” Tankersley said.
That hasn’t stopped traders and investors from utilizing the Direxion Russia fund this month. Volume on RUSL is surging, with more than 10.4 million of the fund’s shares changing hands yesterday, and about 25 million traded today, according to data compiled by Bloomberg. That compares with its historical average of about 245,000 shares. The ETF, which launched in May 2011, has lost 98 percent of its value.
The fund has attracted money for the last five months. About $17 million entered the ETF in November and it lured a record $70 million in September.
“Everybody loves to catch the bottom,” Tankersley said. “When you have something like this, that’s basically been in decline all year long, people are going to be tempted to come in and pick a bottom. Now it’s in the revulsion stage.”