NEW YORK
\nThe removal of Russian bonds from major indices has led to divestment and liquidity challenges for emerging market (EM) fixed income exchange traded funds (ETFs), according to Fitch Ratings.
\nThe sharp decline in Russian bond liquidity, the lack of reliable pricing and the restricted access to the Russian market are making it difficult, if not impossible, for EM ETFs to sell their holdings, which they would otherwise seek to do in order to continue to match the risk and return characteristics of underlying index benchmarks, said Fitch Ratings on Wednesday.
\nJPMorgan and Bloomberg announced the removal of Russian bonds from their respective indices on the March 31 rebalancing date.
\nOther index providers, such as MSCI and FTSE Russell, announced the removal of Russian bonds from their indices from close on March 9 and from open on March 7, respectively.
\nPassively managed ETFs will likely try to exit their Russian positions based on the action the index they follow takes.
\nAccording to Bloomberg, Russian debt typically only accounts for 3%-4% of broad global fixed income EM ETFs, although some ETFs have smaller exposures due to recent market valuation decreases and active divestment by fund managers. For broad global EM ETFs where exposure is de minimis, bonds could be marked down and ETFs could elect to continue holding positions after index providers remove them from their indices.
\nFund managers are more likely to try to sell positions if a willing buyer exists to more closely mirror underlying indices and minimize tracking errors between fund performance and the returns of the benchmark index it tracks. These errors can be exacerbated by high expense ratios or disparate holdings versus the underlying index.
\nTracking errors may be further increased by differences in fair-value determinations from managers and index providers, with some index providers marking the value of Russian bonds down to, or close to, zero. Market quotes for Russian securities are currently not readily available, which may leave funds to determine fair values using models. Fair-value prices are determined by the manager according to procedures adopted by the fund\u2019s board of trustees.
\nThe US prohibited participation in the secondary market for all Russia-related sovereign debt issued on and after March 1, 2022, but funds can divest of bonds issued before this date if a buyer can be found. A 4.75% coupon Russian government dollar bond due 2026 was recently quoted at around eight cents, down from about 110 cents a month ago, according to Advantage Data.
\nRuble- and USD-denominated bonds have very limited or no liquidity according to fund managers. Bonds held by fixed-income ETFs that are affected by limited liquidity include those issued by the Russian sovereign, Gazprom, VEB Finance and Sberbank, according to Bloomberg.<\/p>\n","protected":false},"excerpt":{"rendered":"
NEW YORK The removal of Russian bonds from major indices has led to divestment and liquidity challenges for emerging market (EM) fixed income exchange traded funds (ETFs), according to Fitch Ratings. The sharp decline in Russian bond liquidity, the lack of reliable pricing and the restricted access to the Russian market are making it difficult, […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":{"0":"post-250991","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-business"},"yoast_head":"\n