Russia-Ukraine’s Test Of ETF Structure

Russia-Ukraine’s Test Of ETF Structure

ETF pioneer Herb Blank on how the wrapper is handling Russia getting booted from the market.

Reviewed by: Dan Mika
Edited by: Dan Mika

Herb BlankIn his decades-long career in ETFs, Herb Blank was a consultant to the launch of iShares, built the methodologies behind the Dow Jones indexes and was part of designing several of the largest funds on the market today. If there’s anyone who understands the plumbing behind ETFs, it would be him. caught up with Blank to talk about the new tests for the ETF wrapper as the Moscow Exchange remains halted, Russian assets abroad are frozen by sanctions and index providers cut the country from its products. 

This conversation has been edited for clarity and brevity. In your career, you helped launch iShares, helped build the methodologies for Dow Jones Global Indexes and much more. This seems to be a new situation that's testing the ETF wrapper. What was the thought strategy around building a contingency for an event like this when you were preparing to introduce ETFs onto the markets?  

Herb Blank: Right at the onset of ETFs and the iShares MSCI ETFs, there were a few events. Let me start with Russia. iShares launched in 2001. Before that, [the iShares MSCI ETF series of international equity funds was] called the WEBS iShares MSCI.  

Long Term Capital Management was kicking the tires on the WEBS and using them in their strategies. But before they got into them, they went belly-up because of their overexposure to Russian debt, which created that fear for a period of time since 1998 [after Russia defaulted on its debt]. 

At the same time, we had a lot of attacks on currencies. One of the WEBS that we had was the WEBS Malaysia, which later became the iShares MSCI Malaysia ETF (EWM). Malaysia came under assault because the ringgit had lost [about] 90%of its value. It looked like the same thing almost now with the ruble, but for different reasons. This was an assault by currency traders.  

The prime minister of Malaysia at the time, Dr. Mahathir Mohamad, decided that he was taking the currency off the market, freezing it and fixing the exchange rate, at just five for a dollar, instead of where it was going on the currency market, which was about 1,000 to the dollar.  

Because of that, the WEBS Malaysia was taken off trading for a week. When it was put back on, it went from a NAV of $6.40 a share to a NAV of 50 cents a share. There was an emergency meeting of the board on what to do, and they basically said the shares still have value, even if the currency is up in the air. As soon as the shares start trading normally again on the Malaysian Exchange, they would reopen the fund for trading. It was out about seven trading days.  

So this has happened before, not because one country got crazy and decided to declare war, but somewhat similar circumstances in terms of the fear that things would go to zero. 

As you see now, we've got Direxion deciding to liquidate their 2X Russia fund (RUSL) with the currency going to zero, trying to get investors out at NAV there. I'm not thrilled with that particular decision and what it does for the confidence of ETF investors. Because with iShares and with any other ETFs that decide to close and liquidate, investors did get out fully whole. With contents that aren't worth anything, I don't consider that getting out whole. The major index providers are removing Russia from their products. They’re achieving this by writing those assets down to a price of zero. What do you make of that decision? Do you think that makes sense within the way ETFs are structured? 

Blank: They’ve spent many years trying to make indexes into liquid investments. Basically, what has been a liquid asset simply has become an illiquid asset overnight.  

So if you aren’t in a position where you have to account for it, my advice would be, if you hold individual shares in, say, Gazprom, or PJSC like Lukoil, I'd just hold onto those shares and wait for better times eventually occurring.  

But the problem with selling, with doing anything from an index provider's perspective, is that there's no market cap because the ruble is worth zero right now. You can't exchange normally. 

These indexes are calculated in local currency, but mostly the ones people pay attention to are the ones that are calculated in whatever your native currency is, U.S. dollars or pounds sterling. They have zero value in pounds sterling and U.S. dollars.  

From the index provider standpoint, and having an investable index that's [underlying] a fund, they have to do what they're doing. But people who hold the individual shares might want to hold off. 


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Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.