I’ve been saying for a while that investors should have more exposure to commodities. But resources like industrial metals, gas and oil aren’t that easy to tuck away in your investment portfolio. So, how do you get exposure?
Probably the most common approach is to buy exchange-traded funds (ETFs). You can buy them through your regular stockbroker, and they’re designed to move with various commodity indices – anything from aluminium, through to hogs, soybeans and zinc.
Recently, I argued the case for buying Brent crude oil ETFs. But there are complications with these funds – basically, the price may deviate from the underlying price of the commmodity. Worse, there’s no income… all you get is the chance of profiting from the rise in the price of commodities.
If that puts you off, then I have an alternative for you today. It’s a way to gain exposure to the commodities complex and earn an income.
A proxy for commodities
On Friday, I argued that, trading on an average six times earnings, Russia is probably the cheapest stock market in the world.
Now, you could argue that one reason for that is that Russia is really only a proxy for the commodities complex – particularly oil. If oil comes off the boil, so will Russia’s stock market.
It’s true: the main Russian benchmark index comprises two-thirds resources companies. But the point is, the stocks are already down and out!
I think there’s an interesting opportunity here. Buying Russia gives us exposure to commodities and pays an income at the same time. So how should we do it? Maybe an exchange-traded fund that tracks Russian equities and their yields would do the trick.
Take a look at the chart below. It compares the leading Russian ETF, Market Vectors Russia (blue line) with a Brent crude ETF (red line) over the last year. Both are dollar denominated ETFs trading in New York.
Two things to note. First, the chart pretty much bears out the assertion that Russian stocks tend to follow the oil price. Up and down they go, not in lock-step, but clearly there’s a strong correlation.
The second thing to note is that since the beginning of the year, Russian stocks have underperformed the oil index by nearly 10%.
Market Vectors Russia vs US Brent Oil (both in US$) – one year
Source: Digital Look
As I keep saying, Russian stocks really are out of favour. We know that the commodity markets are expecting oil to fall from its current elevated position. Futures prices say so.
And so it seems Russian stocks have fallen to reflect market concerns about a falling oil price. But what if the oil price fall never comes? That leaves Russian stocks looking phenomenally cheap in my book. In fact, according to Reuters, the forward earnings multiple is only five times earnings!
Regular readers will know that I’m not expecting a major fall in oil prices. So here’s the point. If you want to get exposure to oil, then why not do so via the Russian stock market?
An even better way in?
On Wednesday, I’ll take a look at the JP Morgan Russia (LON: JRS) investment trust. It’s traded in London and, being an investment trust, it’s my favoured way of buying pooled investments. Below is a chart showing JRS versus the sterling Brent oil ETF.
Again, there’s an obvious correlation between this Russian investment trust and the oil price. But in this case, the fund (blue line) has only underperformed the oil price by about 3% over the last year.
Source: Digital Look
I like the look of JP Morgan’s offering. So on Wednesday I’ll talk about it in more detail and you can see if it’s right for you.
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