Trust Putin, Buy Russia


Franklin Templeton brings in the hard countries

Money managing powerhouse Franklin Templeton is widening out its country ETFs, listing new funds that track the biggest companies in countries that are more challenging to get access to. They are:

  • Franklin FTSE India ETF                      FLIN  
  • Franklin FTSE Russia ETF                   FLRU 
  • Franklin FTSE Switzerland ETF            FLSW 
  • Franklin FTSE Asia ex Japan ETF        FLAX 

Russian ETF

FLRU will track the FTSE Russia Capped Index weight, which is made up of Russian large and mid-cap companies. Most of Russia’s biggest companies are energy companies like Gazprom, Lukoil and Rosneft. The index capping prevents any company taking up more than 25%, and ensures that all issuers with weights above 5% do not cumulatively exceed 50%. FTSE Russell includes things like quality of investor protection, tax, and factors of production when considering companies, the prospectus says. The index has 40 companies.

Indian ETF

FLIN will track the FTSE India Capped Index weight, which has the same capping rules as FLRU. The index includes mid and large cap Indian companies, such Indian Oil, Hindustan Petroleum and Tata Steel.

Switzerland ETF

FLSW will track the largest 49 companies in Switzerland, including famous names like Nestle and Credit Suisse. It will do so via the FTSE Switzerland Capped Index, which has the same capping rules as above.

Asia ex-Japan

FLAX will track the FTSE Asia ex Japan Index, which at the time of writing has 885 constituents. The biggest country in this index is Australia, followed by Hong Kong, Korea and Malaysia. The biggest companies are Samsung, Taiwan Semiconductor and the Commonwealth Bank.

ETF Stream Analysis – Buy Russia, Trust Putin

With these listings, Franklin opens another front on its fee war iShares. iShares is the major US provider of country ETFs, but it does so at a higher price – 0.45%. (Franklin’s country ETFs only cost 0.19%). 

It will be interesting to see how these ETFs fly. Russian ETFs are few and far between. Listings and trading Russian shares is harder as there’s less overlap between financial institutions in each country. (How many US money managers have offices in Moscow?) And once the products are listed, gathering assets is hard. Investors tend to be suspicious of Russian politics, which can condemn CEOs to Siberian hard labour, as well as suspicious of the rouble’s stability.

For my part, I think the Russian ETF is a buy and great value. PE ratios of Russian companies are the lowest in the world because investors – including Russian ones – distrust Vladimir Putin. The rouble, though below its historical average due to US-EU sanctions after the annexation of Crimea, has been stable for two years. The result is that dividend yields on Russian ETFs, like ERUS and RSX, range from 4 – 5.5%.

To be sure, Russia’s large caps are mostly in the energy sector, where lower oil prices act as an anchor on the Russian ship. But the price of oil won’t stay this low forever.


Vanguard brings actively smart beta ETFs to the US

Vanguard is consolidating its market-leading position in US smart beta, and will bring its actively managed smart beta ETFs over to the US. (They are currently only available in Canada and the UK). They are:

  • Vanguard U.S. Liquidity Factor ETF Shares                VFLQ
  • Vanguard U.S. Minimum Volatility ETF Shares         VFMV
  • Vanguard U.S. Momentum Factor ETF Shares          VFMO
  • Vanguard U.S. Multifactor ETF Shares                      VFMF
  • Vanguard U.S. Quality Factor ETF Shares                  VFQY
  • Vanguard U.S. Value Factor ETF Shares                    VFVA

Each of the funds “uses a quantitative model to evaluate all of the…US large, mid, and small capitalization stocks and to construct a US equity portfolio,” the prospectus says.  Each of the funds does more or less what’s on the tin: targeting the French-Fama factor that’s in the name. The most expensive of the new funds is the multifactor ETF, which costs 0.18%. The rest all cost 0.13%. They are among the cheapest of any actively managed equity ETFs in the world.

ETF Stream analysis – Vanguard vs. Vanguard

The premise of ETFs is that anything active mangers can do, an index can do better (or at least as well, and cheaper. And with more transparency. And intraday trading). These ETFs offer a unique social experiment on whether that premise is valid.

With these listings, Vanguard’s stock pickers will be pitted off against Vanguard’s passively managed funds that claim to do the same. For example, Vanguard already has a value ETF that passively tracks a value index (VTV). Now Vanguard has an actively managed value ETF as well (VFVA). Which will win, passive value or active value? Given Vanguard is listing both, extraneous variables are controlled. It will be interesting to see how this goes.