Amid stiff sanctions by the West, Russian financial markets are being pushed to the brink. The market situation is so bad there that FTSE Russell and MSCI — the index providers for some of the largest emerging markets exchange traded funds — stripped Russia of its emerging markets status.
That means that when equity markets there reopen, a wave of selling is likely to be unleashed as funds and managers benchmarking to FTSE and MSCI indexes dump Russian stocks. MSCI announced on Wednesday that on March 9 Russia is being reclassified to “standalone” market status. Next Monday, Russian stocks will be removed from all FTSE indexes.
As Russia’s invasion of Ukraine continues, there are lingering implications for emerging markets exchange traded funds that don’t track FTSE or MSCI benchmarks. Those include the Emerging Markets Internet & Ecommerce ETF (EMQQ ) and the Next Frontier Internet & Ecommerce ETF (FMQQ ).
Owing to those ETFs’ focus on growth, fintech, and consumer internet equities, and Russia’s status as an economy with a scant footprint in those industries, neither EMQQ nor FMQQ were heavily allocated to Russian stocks prior to the invasion of Ukraine.
“In the EMQQ index, 6 of our 131 holdings have direct exposure to Russia, and in the FMQQ index, 6 of our 68 holdings have direct exposure to Russia (the FMQQ index is a subset of EMQQ, i.e. EMQQ ex China),” according to the funds’ issuer. “Russia represents less than 1% of the EMQQ Index today, down from 2.9% at the end of December. Russia represents approximately 2% of the FMQQ index, down from 10% at the end of December.”
As of March, EMQQ’s Russia weight was just 0.41%, well below the 1.52% found in the MSCI Emerging Markets Index. FMQQ was slightly higher at 1.97%. Fortunately for investors in both ETFs, neither hold stocks that have primary listings in Moscow — an important and perhaps favorable trait in this environment.
“None of our Russian holdings trade on the Moscow Exchange and none have been directly sanctioned as per our knowledge. We have no direct exposure to Ukraine. However, at present, all our Russian holdings have had trading suspended,” adds the issuer.
EMQQ’s largest country exposure is China at roughly half the fund’s weight while FMQQ’s top geographic exposure is South Korea at 27%.
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