How to make oil pay income

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

Market Vectors Russia vs US Brent Oil (both in US$) – one year chart

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. 

JP Morgan Russian Securities vs ETF Securities Brent Oil - one month chart

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.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Bapodra Investments


    Are you being paid by JP Morgan? Why not also talk about Neptune Russia and Greater Russia? Or do you not have as good a relationship with Neptune than you do with JP Morgan?

    Also Picet do a fantastic Russian fund. Have you seen its returns over a 5 year period. One year it had triple digit returns, yes that’s right triple digit returns. Why not also mention this fund too.

    Something smells!!!

  • Alan

    I’m looking at JP Morgan too, but the discount of 9.5% doesn’t really imply a lack of interest to me.

    What I do like though is Baring emerging Europe. OK, it’s only 60% Russia, but with the rest in Poland and Turkey, that’s a great selection of up and coming nations with big political clout in future.

    Imagine what’ll happen to the Zloty when Britain collapses and 1.5m Poles trek home.

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