Despite Trading Halt Fears, Money Flows into Russia ETFs

Russian Stock Market Plunge Seen as Opportunity.
Trading Suspension Possible Due to Widening Discrepancy Rate

On the 25th, as the US additional sanctions on Russia did not exceed market expectations and geopolitical risks eased, the KOSPI started the session with a 1% rise. Dealers are working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Junho Hwang] Investors trying to take advantage of the plunge in the Russian stock market following Russia's invasion of Ukraine are surging. Although the Russian stock market has been closed, investors in Russian exchange-traded funds (ETFs) have actually surged, causing a widening gap between the ETF price and its net asset value (NAV).

On the 2nd, the Korea Exchange announced a warning designation for the ‘KINDEX Russia MSCI Securities Listed Index Investment Trust’ managed by Korea Investment Trust Management. Due to the widening premium, single-price trading is expected to be implemented starting from the 3rd. Nevertheless, if this premium does not narrow, trading could be suspended as early as the 8th.

The premium refers to the difference between the ETF’s actual value, the net asset value, and the price traded on the stock market. This ETF’s premium widened from 3.03% on the 18th to 23.35% on the 28th.

The premium grew as investors perceived the crisis as an opportunity and flocked in. On the 11th, when Russia’s invasion plan became known, the daily trading volume was only 95.38 million KRW, but it increased to 35.54 billion KRW on the 25th. Individual investors poured in up to 18.3 billion KRW in a single day (February 25). However, liquidity providers failed to supply liquidity promptly in response to the sudden influx of funds, causing the premium to widen. From an investor’s perspective, if they bought this ETF on the 28th, it means they paid a premium of up to 23%. As of 9:39 AM that day, the ETF price was 15,875 KRW, while the NAV was 13,030 KRW, resulting in a premium of 21.83%.

Especially after news that MSCI would remove Russia from its indices, this ETF’s investment faced an even greater challenge. It is expected that Russia will be excluded from the MSCI Emerging Markets Index. The Russian stock market has already been closed since the 25th. However, if MSCI withdraws funds from this ETF, the NAV is likely to decline further. A Korea Investment Trust Management official stated, "MSCI is currently gathering opinions from market participants, including Korea Investment Trust Management," and added, "If MSCI withdraws funds, an indirect impact is expected."

Funds invested in general Russian funds are already frozen. While the ‘KINDEX Russia MSCI Securities Listed Index Investment Trust’ is a synthetic fund that invests in the index and can still be traded, funds directly investing in the Russian stock market have become impossible to redeem since the Russian Central Bank ordered the rejection of foreign investors’ sell orders on Russian securities starting from the 28th of last month.

Despite Russian funds’ returns dropping by as much as 40% compared to their inception, funds continued to flow steadily. The assets under management of nine funds listed on the domestic stock market increased from 154.6 billion KRW on the 21st to 158.7 billion KRW. This is also analyzed as reflecting expectations for a rebound after the Russia conflict.

Hanwha Asset Management, which operates the largest Russian fund by assets under management (58.8 billion KRW), decided to suspend redemptions of the ‘Hanwha Russia Fund’ in response to Russia’s measures. This fund invests about 90% in Russian companies, with approximately 56.6% invested in companies listed on the Russian stock market. Hanwha Asset Management said, "A situation similar to the economic sanctions imposed during the 2014 annexation of Crimea could occur in the future, but we expect this issue to be short-lived." Besides Hanwha, KB Asset Management and Shinhan Asset Management also decided to suspend redemptions on the same day.

This content was produced with the assistance of AI translation services.