The wave of international sanctions that hit Russia following its February 24 invasion of Ukraine has left issuers with standalone Russian ETFs scrambling to figure out what the impact will be on their products.
The unique structure of an ETF – which trades in both the primary and secondary markets – normally provides some level of liquidity in times of crisis, however, the scale and speed of suspensions and shutdowns in global markets left ETFs in an unprecedented position.
Days after the invasion, the Moscow Stock Exchange closed – leaving the world’s largest index provider MSCI to label the market “uninvestable” – in a move quickly followed by ETF issuers suspending creation and renewal orders. redemption on Russian ETFs, closing the primary markets.
Global exchanges then halted trading in Russian ETFs until further notice, closing the secondary market, absorbing liquidity and cutting ETFs off as a form of price discovery, leaving them in a sort of vacuum normally reserved for mutual funds. illiquid investments.
Although ETFs remain suspended in the primary and secondary markets, it is still possible that they will be traded over-the-counter (OTC), however, the nature of these off-exchange transactions means that their liquidity remains a mystery.
Source: Bloomberg Intelligence
According to Bloomberg Intelligence, standalone Russian ETFs have seen nearly all of their $4 billion assets under management (AUM) wiped out since late January, mostly because issuers have written down their Russian stocks rather than fleeing markets. investors.
While the Russian market remains inherently illiquid – foreign investors are also not allowed to sell their Russian holdings – issuers will have tough decisions to make about the future of their products.
“Wait and see” situation
While some issuers have moved quickly to protect investors, BlackRock and DWS recently waived fees on their respective Russian ETFs, the biggest difficulty will be figuring out what happens next and for May it’s too early to call. .
Rebecca Sin, ETF analyst at Bloomberg Intelligence, believes there are four main scenarios facing Russian ETFs.
First, ETFs could resume trading when the Moscow Stock Exchange opens, the “best case scenario for everyone”, according to Sin.
However, that would require a quick peaceful resolution with a complete reversal of Western sanctions against Russia, a scenario that many commentators say is no longer feasible.
“Second, the ETF could be delisted. This could happen if the underlying securities no longer trade, if the value of the shares drops or if sanctions prohibit trading,” she said.
Monika Dutt, research director for passive strategies for Europe at Morningstar, said the appetite for investing in Russian equities has been decimated and could see a scenario where issuers no longer want to manage the products.
She said: “Right now we’re in a situation where a lot of institutional clients and retail clients might not want to own Russia, either from an ESG point of view or from an ESG point of view. compliant with penalties.
“If there is no more client demand, asset managers will have to decide if they want to offer the product and if it still fits their overall investment philosophy.”
Source: Bloomberg Intelligence
The third scenario, and the most unlikely according to Sin, would be to merge the products with other emerging market or global ETFs. “There have been scenarios where this has happened and it’s a possibility, but unlikely,” she added.
According to Sin, the final scenario – based on the continuing uncertainty of the war – could see ETFs shut down for an unknown period, or as long as the Moscow Stock Exchange remains closed.
Roxane Sanguinetti, head of strategy at GHCO, added that it is simply too early to tell what decisions issuers will make on their ETFs.
“Russian ETFs will remain suspended for as long as necessary, and we are in a kind of waiting situation,” she said. “Even if issuers were to close ETFs, they have no way of liquidating the assets because we don’t know when the Moscow Stock Exchange will reopen and whether foreign entities will be able to access it. It’s too early to call him.
What about the underlying?
Despite the many possible scenarios, the outcome of different ETFs could be determined by the type of underlying securities they hold.
For example, Sin said the potential for liquidation is higher for ETFs that hold certificates of deposit, securities listed in the United States or Europe that represent ownership of underlying shares of a foreign company, such as Russia’s largest standalone ETF, the US-listed VanEck Russia ETF (RSX), or iShares MSCI Russia ADR/GDR UCITS ETF (CSRU).
“The potential for liquidation is higher for some ETFs than others and it depends on the holding they hold. RSX, for example, holds over 80% of its holdings in London-listed deposit receipts and is likely to liquidate, while an ETF made entirely of Russian stocks will be more difficult to liquidate,” she said.
“Many of these ETFs also have options on their backs which are currently discontinued and cannot be traded. The impact of the removal of Russian securities is also affecting the options market.
In another ETF quirk, Dutt added that investors can use deposit receipts as a price discovery tool when the primary and secondary markets first close.
“With primary and secondary markets closed, people were using receipts as a price discovery tool. Now the Moscow Stock Exchange is closed, receipts are suspended in the US and UK, so ETFs are suspended entirely,” she said.
“The asset manager will likely have to make the decision based on what’s best for the company and the underlying investor.”
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