ETF Trends CIO and Research Director Dave Nadig join Yahoo Finance Live to discuss Russian ETFs and energy ETFs as MOEX remains closed and the Russia-Ukraine war continues.
Video transcript
KARINA MICHEL: Okay, now we’ll turn things around. It’s time for the ‘ETF Report’ provided by Invesco QQQ. And I want to attract our guest, Dave Nordic, CIO, Director of Research for ETF Trends. Thank you so much for being here, Dave, today. The Russian stock market is still closed, isn’t it, for one day? So what does this mean for Russian ETFs in general, as they are broken?
DAVE NADIG: Yes, so not only is it closed, but it will be closed tomorrow. They announced this a few minutes ago. I think we will be shocked if they open for a session on Friday before going to the middle of the war weekend. So I think it is safe to assume that the Russian market is closed for the foreseeable future.
The big ETFs that track this space are in an interesting position. The largest in space is the RSX, this is the VanEck Russia ETF. Until the last few days it was about $ 1.5 billion, now it’s about $ 200 million for obvious reasons. These funds usually do not have the share capital in MOEX, in the Moscow Stock Exchange itself. They tend to have GDRs, global depositary receipts either in London or sometimes in the United States.
And they are still being traded. The challenge is that they are now trading at really affordable prices. So something like Gazprom, which used to trade for a few dollars, trades in dollars in London, now trades for pennies. And we have Sberbank, which is now withdrawing from Europe, trading and actually bidding 0 for part of the day and bidding a penny for most of the day. Obviously, these are no longer viable securities.
So what is happening in this environment is that the ETF is becoming a price discovery for the Russian market as a whole. So when looking at something like RSX, it’s important to focus on what’s being traded, and not try to worry about net asset values or what the fair value could be. market because there is no fair market for these underlying securities at the moment. This is one of those cases where ETFs are really becoming a whole market.
KARINA MICHEL: If this conflict continues for a long time, what impact will global companies withdrawing from Russian oil projects such as Gazprom affect the sector as a whole?
DAVE NADIG: Well, I mean, we’re really unfamiliar territory. I want to say that the last time we really pushed to create an effective pariah state from a connected country was probably in the late 1970s in Iran, when global markets obviously did not look the way they do now. In fact, I was somewhat shocked by the speed with which the global financial community is moving, not only at the regulatory level, as something like official sanctions, but also at individual companies announcing that they are selling individual projects, especially in the energy sector.
I think it’s very difficult to say what that means with something like big air quotes around it. I think we are really in unexplored territory. So I … what I’m telling people these days is to be very, very careful, trying to call the top or the bottom in every part of it. I think it’s a very dangerous time to start trying to play energy and oil. I think it is a very dangerous moment to try to pay off the bottom of Russian stocks. I think there are too many shoes to throw here.
KARINA MICHEL: How difficult is the position of index providers at the moment, MSCI is removing Russia from its index, and others are under pressure like JP Morgan?
DAVE NADIG: Yes, I think it puts index providers in an interesting position because things have developed so fast. What we have seen that most index providers have said or announced so far is to virtually end all changes to existing indices, meaning MSCI has a Russian index, they are not repealing the Russian index, they are simply saying we will freeze it for a while. time. We will not make any changes, additions, rebalances, corporate actions. It will remain static. This is what the MVIS index, which is behind the big Russian ETF, does. It’s kind of a minimum condition, it’s just something like stepping down from the desk and seeing what the world will look like in a few days.
The bigger question as they move towards the rebalancing period, say towards the end of this month, as they start to look at a market that may not reopen to foreign investors at all, this raises interesting questions about what you are doing. with Russia, say in a broad emerging market index? Do you say it right away? Are you passing? This is a very difficult situation.
It is not even clear to me what a large fund for emerging markets would do with its Russian stocks if they were thrown out of the market – thrown out of the index, because at the moment there is literally nowhere to sell them.
KARINA MICHEL: There are only about a minute left, but I want to ask you what does this do with energy ETFs, especially renewables in the face of this conflict?
DAVE NADIG: Yes, I mean there is– today I read notes from bankers on both sides of this issue. The thing I was looking at that I think is very interesting is KRBN, which is KraneShares Carbon’s credit ETF. It was, sorry, a play on words, a little canary in the coal mine for the reaction here. You’d think that with oil prices, and frankly, all fossil fuels going through the moon, you’d think there would be that repulsion and that need for carbon credits as you move to dirtier and dirtier fuels like coal to make up the difference. But what we’ve actually seen is that they’re swapping down.
I think that, to a large extent, financial players are moving aside to see whether or not we will see a change, especially in the EU’s commitments on renewable energy. The EU was a huge driver for this. It is not unthinkable to think that these rules can at least be delayed or changed after, say, the exclusion of all Russian fossil fuels. But we still don’t know enough. So I think it’s a very difficult sector to call right now. I would honestly advise people to stay away from it if you are not in it. And be careful with the sale, if you already have.
KARINA MICHEL: Okay, keep the words in mind. Thank you so much. We’ll have to leave it there. Dave Nadig, CIO, Director of Research for ETF Trends. Thanks for your time today.