In the wake of Russia’s invasion of Ukraine, Western nations levied punitive economic sanctions against Russia, making the country’s financial markets essentially off-limits to major investment banks, index providers, and fund issuers.
One of the results of those sanctions is significant reductions and, in some cases, outright eliminations of Russian securities in an array of emerging markets exchange traded funds, including some bond ETFs.
“The result has been a decrease in Russia exposure in the J.P. Morgan GBI-EM Global Core Index from approximately 3.9% on 12/31/2021 to 0% on 3/1/2022, reflecting the bonds being marked at nearly zero by the index provider. Within emerging markets high yield corporates, the weight of Russian issuers declined to 1.1% on 3/11/2022 from 4.8% on 12/31/2021, based on the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index notes Fran Rodilosso, VanEck head of fixed income ETF portfolio management.
New York-based VanEck’s emerging markets bond ETFs include the VanEck J.P. Morgan EM Local Currency Bond ETF EMLC and the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM ).
As of February 28, the $3.4 billion EMLC allocated just 1.73% of its weight to Russian bonds. Overall, the fund holds 354 bonds. The $1.2 billion HYEM had a weight of just 1.66% to Russia at the end of last month. For the foreseeable future, it’s likely that EMLC’s and HYEM’s low exposure to Russia is to the benefit of investors.
“Given the unpredictability of the situation as well as the market’s ongoing attempts to react to and interpret various regulatory requirements, it’s very difficult to make any predictions on the impact to bond investors beyond what we know will happen based on index provider announcements and announced sanctions,” adds Rodilosso.
It’s possible that due to some index providers moving to eliminate Russian bonds early this month, the aforementioned ETFs may have lower Russia exposure than end-of-February data indicate. That could benefit investors because the Russian bond market essentially collapsed and liquidity is sparse.
“Lastly, passive fixed income ETFs generally use optimization to match the primary risk and return drivers of their indices in order to achieve their investment objective. In other words they do not fully replicate the index constituents, in order to manage the portfolio efficiently, taking into account factors such as liquidity and trading costs,” concludes Rodilosso.
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