Traders are working on the floor of the New York Stock Exchange on March 4, 2022 in New York.
Spencer Platt Getty Images
Exchange-traded funds tracking Russian stocks have fallen sharply this week and face an uncertain future as the war in Ukraine has led to Russia’s growing isolation from the global financial system.
VanEck Russia ETF (RSX) fell again on Friday, by another 2.4%. The Russian-specific fund is now down more than 63% for the week and more than 76% since early February.
Other large ETFs did not fall on Friday, but only for technical reasons. Early Friday morning, the New York Stock Exchange suspended three ETFs, citing “regulatory concerns.” These were the Franklin FTSE Russia ETF (FLRU), the iShares MSCI Russia ETF (ERUS) and the Direxion Daily Russia Bull 2X Shares (RUSL).
Prior to the shutdown, all these funds were reduced by at least 55% for the week and even more when dating from early February.
The VanEck fund, which is listed on Cboe, was shut down after the market closed on Friday due to regulatory concerns. Earlier this week, VanEck halted the creation of new shares until further notice.
The war in Ukraine and the ensuing sanctions against Russia have wreaked havoc on Russia’s financial system. The Bank of Moscow closed trading on the Moscow Stock Exchange for the whole week.
In some cases, the proceeds of Russian stocks traded elsewhere, such as London or the United States – which are owned by many ETFs – have also been suspended.
Jan van Eck, CEO of VanEck, told CNBC’s Bob Pisani this week that it is not uncommon for ETFs to trade even if the main market is closed.
“ETFs trade all the time when the underlying asset is not traded. Apparently all Asian ETFs trade when Asian markets are closed. Russia, on a normal day, closes at 9 am, so RSX is almost always traded based on stagnant prices. “” said van Eck.
However, the long closure and dramatic moves have created uncertainty about the value of Russian stocks.
Another problem for these funds, as well as for others that track international stocks more broadly, is that market index providers have taken steps to separate Russian stocks.
FTSE Russell and S&P Global announced this week that they would remove Russian stocks from their indices. Similarly, MSCI said it was reclassifying the market as a stand-alone market instead of an emerging one, effectively eliminating Russian stocks from its core indices.
Dramatic declines and lack of liquidity can make it difficult for fund managers to track their indexes, said Ben Johnson, director of global research at Morningstar ETF.
“The question is, well, if I don’t have to own them, how exactly do I get rid of them when I don’t have the viable means to eliminate those positions,” Johnson said.
Some funds may choose to simply set stocks aside and mark them at zero instead of trying to land them, Johnson said.
Lack of liquidity is also a problem for larger investors who may want to buy their shares from the ETF – often described as “outflows” from a fund – instead of simply selling their shares on the open market.
“The mechanism for creating and buying in these pure Russian ETFs for all intentions and purposes is currently fundamentally violated. It just won’t work, “Johnson said.