VWO ex-Russia?

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Snore
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VWO ex-Russia?

Post by Snore »

Hi all, I created an account to ask this question. I've read quite a few posts here, but this is my first.

Basically, I'm trying to find an emerging markets fund that excludes Russia, and it seems surprisingly difficult to find. So, is there an emerging markets ETF that anyone is using that is the rough equivalent of VWO x Russia?

I guess secondly, has Vanguard (or other) expressed interest in creating something like that?

Thanks in advance for responses. ;-)
MnD
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Re: VWO ex-Russia?

Post by MnD »

For every $10,000 of Vanguard Emerging Markets VWO you own, sell short $400 worth of a Russia ETF like RSX or ERUS.
Russia is ~4% of VWO.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Theoretical
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Re: VWO ex-Russia?

Post by Theoretical »

Why would you want to short the Russian market? It's one of the most deep value markets out there, even by its low standards, and even taking the corruption into account.

If you want to do this, then what you need to do is identify the dollar amount that will be your EM allocation and divide it by .92. That represents 2x Russia's allocation to VWO. Then put half of the difference into VWO and the other half to shorting RSX, which is Van Eck's Russia ETF. That will get you to a roughly net neutral position.

The downside is that Russia's market has a 35% annual standard deviation, which means the short could kill you if it booms and the costs of which will kill you as a drag on your returns l.

The better approach would be a small cap emerging fund or an ESG focused EM fund, since no one would say Russia is a particarly well-governed and transparent system.
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oldcomputerguy
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Re: VWO ex-Russia?

Post by oldcomputerguy »

I don't know of one that totally excludes Russia, but there are quite a few that have very small exposure. iShares' IEMG only holds about 3% from the Russian Federation, EEM only has about 3.3%.

If you really, really wanted to avoid Russia, and didn't mind some added complexity, you might approximate your target with ETFs corresponding to the top holdings in IEMG, such as China, South Korea, Taiwan, India, South Africa, and Brazil. iShares has ETFs for most (if not all) of these markets.
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MnD
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Re: VWO ex-Russia?

Post by MnD »

A developed international fund plus an emerging asia and latin America ETF's (ishares offers both of these) will get you a lot of VWO exposure without Russia. You would still be missing India and South Africa as far as notable EM countries.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Whakamole
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Re: VWO ex-Russia?

Post by Whakamole »

I don't see why you'd want to exclude a market from VWO unless it no longer qualified as an Emerging Market (either because it was now Developed or had regressed to a Frontier market.) It defeats the purpose of a broad index fund.
david1082b
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Re: VWO ex-Russia?

Post by david1082b »

It's common to ask for EM funds minus China because it's such a big %, but I've never seen anyone want to avoid a much smaller market like this. Better to buy individual ETFs for nations you want probably.
alex_686
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Re: VWO ex-Russia?

Post by alex_686 »

I am not particularly fond of Russia but are they really that much worse than other EM markets? I can think of other dodgy EM markets. Maybe they are. However I think the cost and complexity of excluding Russia wold not be worth it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Valuethinker
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Re: VWO ex-Russia?

Post by Valuethinker »

alex_686 wrote: Tue Mar 27, 2018 9:33 am I am not particularly fond of Russia but are they really that much worse than other EM markets? I can think of other dodgy EM markets. Maybe they are. However I think the cost and complexity of excluding Russia wold not be worth it.
From an investment point of view, I completely agree with you.

There are other viewpoints but these are offtopic for this forum ;-).

An investment here would arguably be a good counterbalance to an investment in Russia ;-)

https://www.avon-rubber.com/Our-Busines ... ection.htm
Valuethinker
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Re: VWO ex-Russia?

Post by Valuethinker »

Snore wrote: Tue Mar 27, 2018 12:16 am Hi all, I created an account to ask this question. I've read quite a few posts here, but this is my first.

Basically, I'm trying to find an emerging markets fund that excludes Russia, and it seems surprisingly difficult to find. So, is there an emerging markets ETF that anyone is using that is the rough equivalent of VWO x Russia?

I guess secondly, has Vanguard (or other) expressed interest in creating something like that?

Thanks in advance for responses. ;-)
It would be complex to avoid an investment in Russia, as long as it is the relevant Benchmarks.

You might find an actively managed EM fund that does not invest in Russia (but then they could change).

Otherwise you'd have to buy country & region funds such that Russia was not included, in proportionate weightings to the benchmark EM index.

I have half teasingly suggested that the following is a good diversifier against a Russian portfolio ;-)

https://www.avon-rubber.com/Our-Busines ... ection.htm

PS I don't live so very far away from Salisbury, Wiltshire.
lazyday
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Re: VWO ex-Russia?

Post by lazyday »

If the reason for avoiding Russia is ethical, then I think something like this might be best if you can find funds with reasonable ER (expense ratio):
MnD wrote: Tue Mar 27, 2018 7:57 am A developed international fund plus an emerging asia and latin America ETF's (ishares offers both of these) will get you a lot of VWO exposure without Russia. You would still be missing India and South Africa as far as notable EM countries.
And you can use the ishares and SSgA/SPDR sites directly to look for cheap EM funds, or try sites like etf.com or etfdb in case some other ETF company has a good fund.

But if the reason is for better returns or lower risk, then I think you're probably making a mistake and should try discussing with people here who disagree with you.
magicrat
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Re: VWO ex-Russia?

Post by magicrat »

Many companies listed on US and European exchanges have operations in and derive profits from Russia. Will you exclude those as well?
Valuethinker
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Re: VWO ex-Russia?

Post by Valuethinker »

magicrat wrote: Tue Mar 27, 2018 11:47 am Many companies listed on US and European exchanges have operations in and derive profits from Russia. Will you exclude those as well?
There was a natural gas shortage in the very cold weather we just experienced in NW Europe.

The UK took 1 or more LNG cargoes from Russian energy companies which are under the post Ukraine sanctions regime.

Western Europe uses a lot of Russian energy. Russian oil finds its way onto world markets.

That, arguably, is more succor to Russia than actually owning shares in its companies.

Very hard to stay clean.
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whodidntante
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Re: VWO ex-Russia?

Post by whodidntante »

Russia's stock market is about half energy companies. And the rest of their stock market is strongly linked to what happens with energy prices. You can sell oil futures and gas futures. It will cost almost nothing to create this short exposure, although the short exposure might take you to the woodshed. But the same could happen if you short Russian equities, too.

My suggestion is to get comfortable with your Russian comrades. I think you will cut your costs, moderate your risk, and improve your returns versus holding a long term short of Russia.
MnD
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Re: VWO ex-Russia?

Post by MnD »

Theoretical wrote: Tue Mar 27, 2018 7:48 am The downside is that Russia's market has a 35% annual standard deviation, which means the short could kill you if it booms and the costs of which will kill you as a drag on your returns l.
A net neutral position of Russia by shorting a Russia ETF by $4 for every $100 held in a broad emerging market fund will not kill anybody in the event of strong Russia equity gais. The portion of the gain you would enjoy in the general emerging market fund attributable to Russia is offset 1:1 by the loss in the short position and vice-versa.

Your long VWO/short Russia ETF EM portfolio will behave as if you actually purchased a single "VWO ex-Russia" fund.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Theoretical
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Re: VWO ex-Russia?

Post by Theoretical »

The killing is figurative, but the shorting costs will be very significant relative to the investment, especially on a thinly traded etf and that's not counting the retail borrowing rate.

It means the ER of the VWO ex RSX will likely be significantly higher.
MoneyMarathon
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Re: VWO ex-Russia?

Post by MoneyMarathon »

MnD wrote: Tue Mar 27, 2018 3:54 pm Your long VWO/short Russia ETF EM portfolio will behave as if you actually purchased a single "VWO ex-Russia" fund.
Easiest way, to be sure. There may be some additional risk. Sometimes called compounding risk.

Inverse ETFs don't really track -1 times a long position, for a duration of 2 days or more.

https://www.investopedia.com/articles/i ... e-etfs.asp
Topic Author
Snore
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Re: VWO ex-Russia?

Post by Snore »

All, OP here,

Just wanted to say thanks for the discussion and thoughts. I hadn't thought to compare IEMG's country distributions. I wasn't finding a simple off-the-shelf ETF and the comments here confirmed that.

I agree that the simplicity and diversification of low expense fee broadly diversified ETF is tough to beat, especially in emerging and international markets. I do have several country specific ETFs, but as several mentioned, the expense ratios on those are higher and ultimately will likely be a drag unless I'm selecting the right ones - the costs add up. I also have a portion of my portfolio I dedicate to ADR's via quant approach, but I still supplement with international ETFs in large way. As an individual investor it's hard to beat the benefits of broad based international etfs.

Again, thanks so much for the comments.
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Re: VWO ex-Russia?

Post by LadyGeek »

I removed an off-topic political opinion of Russia. As a reminder, see: Politics and Religion
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Re: VWO ex-Russia?

Post by LadyGeek »

Snore, Welcome!

Here is a comparison of the relative size of the world markets. See: Category:Non-US domiciles

Russia did not make the top 10. See page 40 of the referenced report: Credit Suisse Global Investment Returns Yearbook 2017
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