Watch this ETF if the Russia-Ukraine crisis escalates into war, but a fund analyst says an even bigger threat to the market is panic in bonds


Happy Thursday! I’m back and the markets are worried about rising tensions between Russia and Ukraine. We spoke with Bloomberg analyst Eric Balchunas about how investors might position themselves on the possibility of military conflict in Europe and the implications for the broader market.

Meanwhile, bond funds are under a different kind of bombardment, as investors try to sniff out the Federal Reserve’s inflation-management tactics. Balchunas says capital outflows into fixed income funds have so far been “orderly”, but says investors should watch this space, which could hold greater potential to shake up markets.

Either way, send any tips or comments, and find me on Twitter at @mdecambre or LinkedIn to tell us what you think are important topics for ETF Wrap.

Good
Top 5 winners from last week %Performance

SPDR S&P Metals & Mining ETF XME,
-0.52%

5.1

ETFMG Prime Junior Silver Miners SILJ,
+1.01%

4.8

VanEck Junior Gold Miners ETF GDXJ,
+1.90%

3.6

ETF iShares MSCI Brazil

3.4

Global X Silver Miners ETF SIL,
+1.02%

3.3

Source: FactSet, through Wednesday February 16, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe of $500 million or morer
…and evil

Jop 5 last week refusal

%Performance

Real Estate Select Sector SPDR Fund XLRE,
-0.86%

-4.7

Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF SRVR,
-0.69%

-4.5

iShares Cohen & Steers REIT ETF ICF,
-0.83%

-4.4

iShares MSCI Sweden ETF EWD,
-3.85%

-4.0

iShares US Utilities ETF IDU,
-0.01%

-3.8

Source: FactSet
ETFs for a war footing?

We caught up with Bloomberg’s Balchunas on Thursday morning, as a tenuous (if you can even call it that) detente broke down between Ukraine and Russia. An invasion of Kiev by Moscow seemed imminent, with President Joe Biden telling reporters on the White House lawn that the likelihood of a Russian invasion was “very high” and could happen in the “coming days”.

With the threat of war looming, the Bloomberg analyst said investors primarily voiced their views on the possible market impact through the VanEck Russia ETF RSX,
-5.18%,
which holds some $1.4 billion in assets, and had seen strong volume last week, which has since cooled, he said.

“The volume of this ETF will tell you how seriously people take this,” Balchunas told MarketWatch, referring to tensions between Ukraine and Russia.

He said the ETF is not typically used by mom and pop investors and instead tends to be used by traders to hedge their emerging market exposures.

“Single-country ETFs have a strong correlation with geopolitics,” he said.

We have already discussed the VanEck Russia ETF in ETF Wrap. It has an expense ratio of 0.67%, which translates to an annual cost of $6.70 for every $1,000 invested and the Bloomberg analyst says it’s much more popular than its counterpart , the iShares MSCI Russia ETF ERUS,
-5.04%,
which carries an expense ratio of 0.59%.

Both are up so far this week. The iShares fund has gained 3.9%, while RSX, referencing the ticker symbol of the VanEck ETF, has gained 4.9% so far this week. They are both down so far in 2022, with RSX down 8.7% versus an 8% decline for iShares.

Energy fund

Beyond the country funds, the Energy Select Sector SPDR Fund XLE,
-0.16%
could also attract trading volumes as investors position themselves around the potential for the conflict near Ukraine to influence energy prices. A military confrontation could lead to the blockage of natural gas supplies NG00,
-4.32%
to Europe from a gas pipeline between Russia and Germany known as Nord Stream 2 and through other gas pipelines. Construction of the pipeline is complete, but it is not yet operational.

Reports suggest that Europe has become more dependent on Russian energy.

The Energy Select ETF is down 2.7% for the week, but has climbed more than 23% since the start of the year. A few natural gas-focused ETFs were also impactful, with the United States Natural Gas Fund UNG,
-0.95%
up 13% on the week and 27% on the year to date. Neither fund gives a clearer view of the impact tensions in Russia would have on Europe, but analysts say the search for so-called alternative fuels could spill over to segments of the energy complex.

Panic on the bond floor?

Balchunas had more to say on fixed income. “There’s nowhere to hide and it’s kind of alarming,” he told Wrap.

The analyst, referencing a recent article he wrote for Bloomberg, says bond mutual funds have now “seen two straight weeks of outflows totaling $30 billion, with exchange-traded funds adding $10 billion. extra dollars”.

The losses on ETF land reflect some of the negative sentiment emanating from the bond market as investors position themselves for a higher rate regime and tougher Federal Reserve policy to fight inflation. Rising inflation is bad for bonds because it erodes fixed values, but higher interest rates also mean that investors will be less inclined to buy existing bonds expecting richer returns to come.

These factors give fixed income funds a punch.

“Fixed income securities are meant to be a hedge against market volatility, but so far that hasn’t been the case,” Balchunas said.

Balchunas said the Fed has been dovish over the past 10 years, but the regime shift to higher interest rates means there’s no safety in fixed income right now . He said so far exits have been relatively orderly, but warned that if “people’s mentality starts to change” problems could arise.

“The shock value would be high,” he said.

Bloomberg


He said that if a large, leading bond mutual fund starts to halt investor redemptions, which he thinks is a real possibility, although there are no signs that it is imminent now, it would could affect the markets. Here’s what he wrote in Bloomberg News on Wednesday:

This is already happening; the most liquid bond ETFs – HYG, LQD and TLT, for example – are already seeing billions of dollars in outflows this year. Family investors do not sell these ETFs; they are professional fund managers. Once they have sold all of their ETFs and the exits continue, they will have to sell real bonds, which will drive prices down and lead to negative returns, which will trigger more exits, which will force them to sell more of bonds, which will depress prices and their yields. You had the idea. This downward spiral would begin to dry up liquidity in the bond market and could eventually lead the fund to suspend redemptions. Panic would ensue.

The iShares 20+ Year Treasury Bond ETF TLT,
+0.74%
was down so far on the week and down 7.7% so far in 2022. The iShares iBoxx $High Yield Corporate Bond ETF HYG ETF,
-0.42%
is up 0.3% so far on the week, but down 4.7% on the year, and iShares iBoxx $ Investment Grade Corporate Bond ETF LQD,
+0.07%
was down 1.1% in the week and down almost 7% in 2022 so far.

Loyalty goes green

MarketWatch’s Christine Idzelis writes that Fidelity Investments is offering four new funds focused on environmental, social and governance criteria, including three mutual funds and one exchange-traded fund.

The Fidelity Sustainable International Equity Fund (FSYRX), Fidelity Sustainable Emerging Markets Equity Fund (FSYJX), Fidelity Sustainable Multi-Asset Fund (FYMRX) and Fidelity Sustainable High Yield ETF FSYD will target companies with strong ESG ratings, reported Idzelis Thursday. .

“We are constantly monitoring where companies fit in relation to each other on their ESG journey,” said Pam Holding, co-head of equities and head of sustainable investing at Fidelity. “These are actively managed strategies.”

For the record, as of Tuesday’s close, the Dow Jones Industrial Average DJIA,
-1.78%
since the beginning of the year is down 1404.03 points or 3.86%. The S&P500 SPX index,
-2.12%
is down 291.17 points or 6.11%, and the Nasdaq Composite COMP,
-2.88%
is down 1520.88 points or 9.72%.

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