Checking In: A Glasnost Play

Well documented is the fact that Russia has been the best-performing member of the BRIC quartet in 2011, a performance that has no doubt been helped by rising oil prices. To Russia's credit, it's inflation scenario isn't nearly as bad as its BRIC brethren.

Also well known is the fact that when an investor gets involved with a Russia-specific ETF, they are basically buying an ETF that is a play on oil prices. The Market Vectors Russia ETF (NYSE: RSX), the king of the Russia ETF block, allocates 44% of its weight to the energy sector. RSX's main rival, the iShares MSCI Russia Capped Index Fun (NYSE: ERUS) goes even further and devotes nearly 52% of its weight to the energy sector.

Energy has and probably always will loom large in the Russian economy, but as that economy diversifies, investors may do well to take a different approach and avail themselves of today's “Checking In” candidate, the Market Vectors Russia Small-Cap ETF (NYSE: RSXJ).

With an expense ratio of 0.67%, RSXJ is now five months old and has attracted $3.8 million in assets under management. That's not a jaw-dropping total, but keep in mind for much of RSXJ's short lifespan it has been laboring in a market environment that has been hostile to emerging markets ETFs.

Asking the question “Why does RSXJ have better days ahead of it?” is fair and important to ask. It's also an easy question to answer. For starters, small-cap country-specific emerging markets ETFs have consistently proven popular with investors and this is a territory Market Vectors knows well. Just look at the success of the Market Vectors Brazill Small-Cap ETF (NYSE: BRF).

Second, the first-to-market advantage can not be understated when it comes to ETFs. RSXJ is the first Russia-specific small-cap ETF. Think this isn't important? Again, look at the success of BRF.

Beyond those intangibles, RSXJ is a legitimate way to tap the Russian growth story from a broader perspective. Yes, energy names account for 17.5% of the ETF's weight, but that's only good enough for the third-largest sector allocation. Four other sectors (utilities, materials, industrials and consumer staples) also land double-digit weights.

We're not going to tell you to “tear down this wall” when it comes to investing in Russia, but we will advocate a shift in approach to Russian small-caps. As the Russian economy continues to grow, so does the allure of RSXJ and come December, this ETF could be one of the shining stars of the 2011 crop of new ETFs.