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ETFs are becoming Russia's 'entire market' as Moscow exchange remains closed: Strategist

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ETF Trends CIO and Director of Research Dave Nadig joins Yahoo Finance Live to discuss Russian ETFs and energy ETFs as MOEX remains closed and the Russia-Ukraine war continues.

Video transcript

KARINA MITCHELL: OK, we are going to turn things over now. It's time for the 'ETF Report' brought to you by Invesco QQQ. And want to bring in our guest, Dave Nordic, CIO, director of research for ETF Trends. Thanks so much for being here, Dave, today. The Russian stock market is still closed, correct, for a day? So what does that mean for Russian ETFs in general because they're getting clobbered?

DAVE NADIG: Yeah, so not only is it closed, it's going to be closed tomorrow. They just announced that a few minutes ago. I think we'd be shocked if they opened for one session on Friday before going into a weekend in the middle of the war. So I think it's safe to assume the Russian market is closed for the foreseeable future.

The big ETFs that track this space are in an interesting position. The biggest one in the space is RSX, it's the VanEck Russia ETF. Until the last couple of days, it was about $1.5 billion, now it's sitting at about $200 million for the obvious reasons. These funds don't generally own the underlying equity in the MOEX, in the Moscow Exchange itself. They tend to own GDRs, global depository receipts, either in London or sometimes in the United States.

And those are still trading. The challenge is they're trading now at really delistable prices. So something like Gazprom that previously was trading at a couple of dollars, it trades in dollars in London, is now trading at literal pennies. And we have Sberbank which is now pulling out of Europe, trading, and actually bid 0 for part of the day and bid a penny most of the day. Obviously, these are not viable securities anymore.

So what happens in this environment is the ETF becomes price discovery for the Russian market at large. So when you're looking at something like RSX, it's important to focus on what it's trading at and not try to worry about net asset values or what it might be quote-unquote worth in a fair market because there is no fair market for those underlying securities right now. It's one of those cases where ETFs really become the entire market.

KARINA MITCHELL: If this conflict continues for a protracted amount of time, what impact does global companies pulling out from Russian oil projects like Gazprom have on the sector as a whole?

DAVE NADIG: Well, I mean, we're really unknown territory. I mean, the last time we really had a push to effectively create a pariah state out of a connected state was probably the late '70s in Iran, when obviously global markets looked nothing like they look right now. I've actually been somewhat shocked by the speed at which the global financial community has moved, not just in sort of a regulatory level like it's sort of official sanctions but individual companies announcing that they're selling individual projects, particularly in the energy sector.

I think it's very difficult to say what that means with sort of big air quotes around it. I think we are genuinely in untested territory. So I'm-- what I'm telling people these days is to be very, very cautious trying to call a top or a bottom in any piece of this. I think it's a very dangerous time to start trying to play energy and oil. I think it's a very dangerous time to try to call a bottom in Russian stocks. I think there's far too many shoes to drop here.

KARINA MITCHELL: How difficult a position are index providers in at this point, MSCI removing Russia from its index, others under pressure like J.P. Morgan?

DAVE NADIG: Yeah, I think it puts index providers in an interesting position because things have moved so quickly. What we've seen most of the index providers say or announce so far has been effectively a cessation of any changes to the existing indexes, that is, MSCI has a Russia index, they're not canceling the Russia index, they're simply saying we're going to freeze it for a while. We're not going to make any changes, additions, rebalances, corporate actions. It's going to stay static. That's what the MVIS Index behind the big Russian ETF is doing as well. That's sort of a minimum condition, that's just sort of a pushing back from the desk and seeing what the world is going to look like in a few days.

The bigger question as they move towards rebalance period, say towards the end of this month, as they start looking towards a market that may not reopen for foreign investors at all, it creates interesting questions about what you do with Russia say in a broad emerging markets index? Do you kick it out right away? Do you transition out? It's a very difficult situation.

It's not even clear to me what say a big broad emerging markets fund would do with their Russian stocks if it got kicked out of the market-- kicked out of the index because there is literally nowhere to sell them right now.

KARINA MITCHELL: Only about a minute left but want to ask you, what does this do to energy ETFs, particularly renewables amid this conflict?

DAVE NADIG: Yeah, I mean, there's-- I've read notes today from bankers on both sides of this issue. The thing that I've been looking at that that I think is very interesting is KRBN, which is the KraneShares Carbon credit ETF. It's been a pardon the pun, a little bit of a canary in the coal mine on reaction here. You would think that with prices for oil and frankly, all fossil fuels headed through the moon, you would think that there'd be this pushback and this need for carbon credits as you move towards dirtier and dirtier fuels like coal to make up the difference. But what we've actually seen is them trade way down.

I think that's largely financial players moving to the sidelines to see whether or not we're going to see some change, particularly in EU commitments to renewable energy. The EU has been a huge driver of this. It's not inconceivable to think that those rules might at least get delayed or changed in the wake of say turning off all Russian fossil fuels. But we just don't know enough yet. So I think it's a very difficult sector to call right now. I would frankly advise people to stay away from it if you're not in it. And be cautious about selling it if you already are.

KARINA MITCHELL: All right, words to heed there. Thank you so much. We'll have to leave it there. Dave Nadig, CIO, director of research for ETF Trends. Thanks for your time today.

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