KRX issues warning against ETF tracking Russian stock market

A Russian ruble banknote is seen in front of a descending stock graph in this illustration made March 1, 2022. Reuters-Yonhap

MSCI removes Russian equities from EM indexes

By Anna J. Park

The Korea Exchange (KRX) has warned investors to be cautious about investing in local Russia-related mutual funds, which have stopped being redeemable for the time being following the imposition of multiple layers of international sanctions on Russia.

Currently, a total of eight Russia-related mutual funds and one ETF product are being operated in Korea with about 162 billion won ($134 million) worth of money invested in them. Their average rate of return so far this year stood at a minus 41.3 percent due to the Russian stock market's plunge late last week.

Against this backdrop, the KRX issued an investment warning against “KINDEX Russia MSCI,” the only listed ETF product in Korea tracking the Russian stock market.

The bourse operator explained that the ETF's gap between the product's net asset value (NAV) and its trading price on the Korean stock market has exceeded the legal limit of six percent, thus ordering an investment warning for investors.

The closing price on Tuesday showed the price differential ratio for the NAV and its trading price exceeding 30.26 percent, meaning that the ETF was overpriced by more than 30 percent compared to the real value of the Russian stocks.

The price of the KINDEX Russia MSCI ETF fell by 9.16 percent at Thursday's close. The ETF also fell 16.68 percent at Wednesday's close. Yet, the amount of money flowing into the ETF increased by about 20 billion won in the past week, which is almost a 93-percent jump from its previous assets under management.

Market experts raised a voice of caution on the part of retail investors, that while their bet on the Russian stock market could succeed if the war ends soon, they could face a huge loss if the situation doesn't improve for a long time.

Local asset management firms also decided to suspend the redemption of mutual funds related to Russia. Hanwha Asset Management said the firm's Hanwha Russia fund has stopped receiving new purchases of the funds as well as redemption of the funds. Other asset managers, including Shinhan, Kiwoom and KB, also decided to suspend Russia-related mutual funds.

Meanwhile, MSCI decided to remove Russia from its Emerging Markets (EM) Indices on Wednesday, local time. Russian stocks will be reclassified as a Standalone Market.

“MSCI received feedback from a large number of participants, including asset owners, asset managers, broker dealers and exchanges, with the overwhelming majority confirming that the Russian equity market is currently uninvestable and that Russian securities should be removed from the MSCI Emerging Markets Indices,” MSCI said in its statement.

FTSE Russell also said it plans to remove Russian stocks from its indices.