RSX – the price discovery of ETFs
Thanks to sanctions, there is no way for foreign investors to buy or sell shares in Russian companies.
With Russia’s market closed and Russian stocks getting ejected from major indexes, the fact that Russia ETFs – most notably VanEck’s RSX – continue to trade is receiving increasing attention. The huge trading volumes in RSX – 30x its daily average – raises questions about what will happen if sanctions are escalated or maintained indefinitely. And raises questions about the role ETFs play in capital markets.
A lot of people are taking a purely negative view of RSX and its continued trading. RSX has fallen 80% this fortnight, which doesn’t help. VanEck recently shut redemptions, meaning the fund is locked and cannot give investors their money. This doesn’t help either.
However there are some good things to say here about the ETF structure overall.
The most obvious is that at least it’s not a Neil Woodford rinse and repeat. Retail Investors owning the ETF who want to exit still can. They aren’t stuck waiting for an eventual liquidation. There is a secondary market for ETF investors to sell on.
Another positive is that there seems to be no other way to price Russia’s share market at the moment. Thanks to banking sanctions, Russia’s share market is the very definition of Siberia. ETFs meanwhile offer tradeable prices. As such for anyone curious what Russian assets a worth, ETFs are offering an indicator.
We have been here before. During the 2020 covid panic, when bond ETFs tanked away from their index values, a lot of people raised this argument. Bond ETFs provide price discovery, they said. As the easiest way to trade bonds, they let everyone know where the market was.
Finally, at least ETFs are offering some way of expressing a view on Russia – even if wholly negative. (Anyone got up to date short interest on RSX?). As Russia gets booted from every index, the market is overwhelmingly selling Russian assets. Buyers need to be found somewhere, or you don’t have a market and the value is zero. And all the buyers are in the ETF world.
While I think it’s an interesting picture for Russia ETFs right now there are obvious drawbacks.
For one, it’s not clear if these ETFs are sustainable. If the war gets worse, sanctions escalate, and the prices of these ETFs goes close to zero, regulators will step in and delist the ETFs. As such, the huge price drop on RSX should at least in part be interpreted as delisting risk.
Second, these huge price drops are obviously hurting ETF providers – especially the small and medium sized ones, who tended to have the most Russia exposure.
Once upon a time – a whole 12 days ago – RSX was of VanEck’s cash cows. A triumph of product building, the fund held a mighty $1.37 billion in assets. On a management fee of 0.67%, RSX provided $9 million a year in revenue.
But now RSX’s holds just $85M. Meaning its annual revenue is now slightly more than $600K. If the collapse continues, RSX could soon be providing no revenue at all.
For the ETF industry to thrive, we need small and medium sized ETF providers. This loss of revenue won’t help.
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