Why FXRL remains one of the most profitable collective investment vehicles in Russian equities

180% — this is how much FXRL has brought to investors since it was launched on the Moscow Exchange in 2016. And only 0.58% was his «tracking error». Therefore, FXRL is ranked # 1 in index tracking accuracy among all stock index funds in the Russian market. We talked with FinEx top managers Oleg Yankelev and Vladimir Kreindel about what allows the fund to maintain such high positions, why bloggers and «educators» predicted the opposite picture and what are the future prospects of the Russian market.

Vladimir Kreindel, Executive Director of FinEx ETF

Oleg Yankelev, Managing Partner, FinEx Capital Management

Vladimir Kreindel:

Second, RSX invests in ADRs (depositary receipts for Russian shares), which means inevitable losses in receiving dividends and the cost of maintaining the receipts program. This money goes to depositories, not to investors in RSX. FXRL uses predominantly local securities, which means there are no hidden costs.

Vladimir Kreindel

See for yourself: the dividend yield on the Moscow Exchange / RTS Index is 4.4-5%. According to the double taxation agreement between Russia and Ireland, FXRL pays 10% tax on dividends of Russian companies. And OPIF / BPIF as a property complex does NOT pay taxes on dividends at all. This means that the BPIF handicap should be about 0.44-0.5% — if there are no losses caused by the peculiarities of the investment process.

But they use this advantage poorly: the statistics are relentless — the “tax advantage” literally “seeps through the fingers” of Russian managers.

Oleg Yankelev

The situation with the largest BIPIFs in Russian stocks is, to put it mildly, worse. So, SBMX has a tracking error of 1.57%, VTBX — 8.24%, TMOS — 2%. And if the error is high, then any return that the BPIF will show is rather random: the value of the fund may significantly deviate from the index.

What would an investor expect from Russian BPIFs on the Russian stock market? Systematic outstripping of FXRL at any time frame due to the «tax handicap». What do we really have? A chaotic picture — in some periods, mutual funds are slightly ahead of ETFs, while in others, on the contrary, they lag behind. This is evidence of a high tracking error in real life.

However, I often hear that «tracking error» is just a technical indicator that is not at all important for the end investor … I hope this is simply from ignorance, and not an attempt to mislead investors.

If I were managing retirement fund money and had to choose, I would prefer a fund with the most accurate index tracking possible. Of course, in this case, I would act as a fiduciary and act based on the interests of the client.

Vladimir Kreindel:

Vladimir Kreindel:

Oleg Yankelev:

Vladimir Kreindel:

However, there are also more positive forecasts for Russia. So, JPMorgan AM expects an average annual rate of 6.5%, while optimists from Research Affiliates — 12%.

Oleg Yankelev:

Vladimir Kreindel:

On the other hand, home bias typical for residents of any country (preference for the “home market”) leads to the fact that now the share of Russian shares is one third of the funds invested by Russians (

Oleg Yankelev:

However, surprises cannot be ruled out: if, given the same economic indicators, the narrative, which was accepted by the majority of large foreign investors, changes, the Russian market may show significant growth. However, the change in mood depends on geopolitical factors, and this is an unpredictable matter.

Vladimir Kreindel:

Of course, everything depends on the starting point: compare the RTS and the S & P500 since 2005, and it turns out that the Russian market has outperformed the US market by 71%. Compare with 2015 — and the advantage will only grow — to 116%. But if you choose the beginning of 2007 as a starting point, then the US market will be unconditionally ahead, by 227% … What does this mean? I believe that in the portfolio of a reasonable investor there will be a place for both the US market and the Russian market, given the high volatility of domestic stocks.