Industry Updates

Sharp rise in sanctioned stocks a ‘wake-up call’ for ETF liquidity

‘Tainted’ ETFs carry reputational risks for issuers

Theo Andrew

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The sharp rise in the number of companies under sanction since the onset of the war in Ukraine has been described as a “big wake-up call” for ETFs globally.

According to the Six Sanctioned Securities Monitoring Service (SSMS), companies under sanction have risen by 262%, from 24,000 to 89,000, since the onset of the war in February last year, posing risks to the valuation and liquidity of “tainted” ETF products.

SSMS estimates that 7% of all ETFs contain sanctioned companies, with 30% of the companies coming from Russia, 30% from the US and 26% from China.

Almost half (47%) of the ETFs are domiciled in China while 28% are housed in the US and 13% in Ireland.

Asset managers and index providers are required to screen their ETFs for sanctioned securities in compliance with the Office of Foreign Assets Control (OFAC) commitments.

However, the scale and the speed of the increase in sanctions have led to growing concerns some firms could be caught out, with reputational risks for those involved, SSMS said.

Oliver Bodmer, senior product manager for financial information at SIX, said: “This is a big wake-up call for the ETF universe, as the rollout of sanctions on Russia and China shows no signs of abating, meaning the number of ETFs with sanctions or tainted securities is on an upward trajectory.

“In this fast-moving sanctions environment, those firms creating and distributing ETFs need transparency to ensure they can act in line with OFAC requirements on the funds already created and ensure that no tainted securities are included in new products.”

He added assets would be much more likely to flow into “different investments with better performance that do not contain in-scope securities”.

Following the Russian invasion of Ukraine, asset managers suspended and later closed their Russian equity ETFs after a wave of economic sanctions from western economies.

MSCI removed Russian securities from its indices after labelling the market “uninvestable”.

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