Situation With Russian ETFs Highlights A Bid Risk

As the world watches Russian troops attack Ukraine, global leaders impose sanctions on Russia, as opposed to sending military personnel to assist the Ukrainian people with repelling Russian forces. Over the long term, these sanctions may impose more damage on Russia and the companies that lay within its borders than troops perhaps could. It is unknown, though, at this time, what the total economic toll of these sanctions will be on Russia and its economy; however, most analysts feel it will be substantial.

But what may be more destructive long-term for Russia is not what is happening to the country today but what may not happen to Russia in the future, new development and investing. The Russian stock market shut down shortly after Russian troops entered Ukraine. But not only did Russian stocks stop trading in Russia, but also in the US and other markets worldwide. Furthermore, countless foreign businesses that had operations in Russia have pulled out and no longer operate their stores, shops, and factories in the country.

So, both the individual business investments have walked away from Russia, and the world financial markets have essentially cut Russia off from capital. This lack of capital both from the smaller individual standpoint and the larger global point of view, could put Russia in a tight spot in years to come as the country and its businesses may struggle to grow and re-invest in themselves without the support of foreign investment.

Obviously, anyone who owned stock in Russian companies prior to the invasion of Ukraine is probably not in a good spot right now either. Whether it was through individual stock holdings or funds like the VanEck Russia ETF (RSX), the iShares MSCI Russia ETF (ERUS), or hopefully not the Direxion Daily Russia Bull 2X ETF (RUSL), which no longer trades and could have put some investors in some serious pain since it is a leveraged product. Not only does the RUSL no longer trade, but all Russian ETFs are currently suspended, leaving investors in the dark in terms of how and when they may be able to get their money out of these products.

While the situation in Russia is unique in terms of it being a larger market to invest in, it shut down its capital markets during this time of distress, let alone the rest of the world, restricting the trading of Russian assets.

However, investors need to remember that whether it's investing in small, medium, large, developed nations, or undeveloped nations, things happen, and sometimes the markets you own assets in are not open to trade. Just recently, many US investors went through some situations with Chinese stocks, which were being delisted. While not all Chinese stocks were removed from US markets, some still have been.

From time to time, even the strongest markets in the world have events occur that cause certain markets to close for a few days or weeks. The terrorist attacks on 9-11 caused the New York Stock Exchange to close for a few days.

But, the closure of an exchange usually isn’t the worst part, it’s the following day when that exchange opens, and prices fall through the floor as everyone rushes to the door and access their capital. With Russia, their stocks and the ETFs that follow them have already been crushed. Although they still are not at zero yet, so they could fall even further when they begin trading once again.

I wanted to highlight all of this to remind investors that just because you own stocks in top companies or top regions of the world, things still happen. At some point, you may want to access your capital but not be able to because a world event is occurring and the US market is closed. Perhaps though, even more so than that, is the idea that when you are investing internationally, you should diversify your international investments through the use of regional and demographic funds that own, say, all of Africa or South America, not just Brazil or Egypt. This way, if something does occur, you aren’t looking at a 100% loss, maybe just a slight haircut if you are lucky.

Nothing about investing is 100%, so you should always attempt to put as many risk management techniques to use as you can.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Leave a Reply

Your email address will not be published.