Clearing the Inbox: ETFs that Hold Only Russian Equities

Exchange-Traded Funds (ETFs) holding only Russian equities have had creations suspended and trading halted since the war in Ukraine commenced. David Mann, Head of Global ETF Capital Markets, addresses the most commonly asked questions on these events.

Watching the tragic human toll caused by Russia’s invasion of Ukraine makes it difficult to focus on mundane topics such as the ETF ecosystem. The world’s response to this act of aggression and specifically the sanctions implemented against Russia have greatly impacted access to their financial markets. This in turn has had a significant impact on ETFs that primarily hold Russian equities (full disclosure: we have one of those). For this week’s newsletter, I will attempt to summarize the questions we received about ETFs that only hold Russian equities.

Can you explain the excessive premiums to net asset value (NAV) before trading was halted?

During trading that occurred specifically between the start of the invasion (2/24/22) and when NYSE Arca announced halting (3/4/22) ETFs holding only Russian securities saw some of the highest premiums I’ve ever seen in relation to NAV—over 1,000% at times.

To put that 1,000% into context, consider that in March 2020, during the onset of the global pandemic, the highest premiums on the same ETFs were around 5% to 10%. The lowest discounts were in the 10-15% range.

At the time, I blogged about wider spreads and greater premiums and discounts during moments of heightened market uncertainty (link). Since markets for the underlying Russian securities were closed, the uncertainty pertaining to Russian stocks was incredibly high. US authorized participants (as well as the ETFs themselves) were restricted from buying, selling or settling Russian securities. Broad economic sanctions were announced almost daily, leaving investors in the lurch as they tried to navigate the potential impact of those sanctions.

Surprisingly, I don’t have much to add to this topic from what I wrote two years ago: when there is uncertainty to that extent, trading will look more like single stocks or closed-end funds than open-ended ETFs. That was certainly the case during the first week of trading after the Russian invasion began.