Revolution on the Moscow Exchange
After the rapid growth in the number of ETF mutual funds (exchange-traded investment funds) and their assets, the next stage begins: the expansion of the range of instruments represented in the funds. This will help small investors to diversify their portfolios.
ETF mutual funds have created a real revolution on the Moscow Exchange. Over the past two years, their number has almost tripled, exceeding 110, and their assets have reached 190 million rubles.
Investments for Everyone
Recall that the essence of mutual investment funds is in collective investment, which is reflected in the word “mutual” in their name. They are extremely popular: the net assets of these funds in the United States exceed $21 trillion, which is comparable to the GDP of the United States.
Mutual funds allow investors with even small amounts of available cash to regularly invest in a wide range of securities or other assets. For the economy, this means a constant inflow of the savings of the widest strata of the population to the stock market, which has several advantages at once. First, companies that need capital can be sure that they will receive it, even if they do not resort to the complex procedure of “people’s IPOs” (after all, fund managers themselves monitor the placement of new issuers). Secondly, the stock market itself becomes less volatile, as mutual funds usually adhere to a conservative approach and hold securities for a long time, rather than playing on daily fluctuations. Finally, citizens themselves get the opportunity to invest their savings with a potential yield higher than a deposit – but at the same time they are spared the need to choose securities on their own, conclude transactions, and then decide whether it is time to sell. The manager does it all for them.
In the early 1990s, the mutual fund industry abroad began to change rapidly, and such a subspecies as exchange-traded funds – ETFs – appeared. The essence of an ETF is that the role of the asset manager in it is nullified; no one needs to think about when to add to the fund and when to get out of the assets. The ETF portfolio completely copies the composition of the benchmark – for example, the S&P Index – that is, it contains exactly those stocks and in the proportion that are in the index. ETF shares are traded on the stock exchange, and it is as easy to buy them through a brokerage account as ordinary shares. Due to the lack of offices to visit and the lack of remuneration of a manager, ETF have managed to reduce commissions by several times, to several tenths of the net asset value.
In Russia, unfortunately, the industry of mutual funds has not yet gained popularity – their assets, together with closed-end funds, do not reach even 1.5 billion rubles. But it is mutual funds that are best suited for a truly typical investor. Right now, out of 21 million open brokerage accounts, 19.6 million people have accounts which are empty or contain small amounts (about several thousand rubles). Investments on the stock exchange remain the domain of very wealthy citizens – so 60% of the assets in brokerage accounts are in the hands of only 0.22% of clients. Only mutual funds can solve this problem. For example, the price of one share of an ETF can be only 10 rubles.
Finally, mutual funds allow you to invest in assets that are otherwise simply not available to a private investor – for example, in money market instruments such as the repo market. And for example, investing in gold through a mutual fund is an order of magnitude more convenient than buying a bar: it is easier, and you can invest a small amount and then sell part of the shares if necessary (while the bar can be sold only as a whole).
The Boom in Exchange-Traded Funds
The first step towards truly mass investments has already been taken: the number of BPIF (the Russian abbreviation for ETFs) on the Moscow Exchange has grown actively. However, this growth slowed at the end of the summer, and now managers say that emphasis will be placed not on creating new mutual funds, but on optimizing the line of existing ones.
“Exchange-traded funds remain one of the promising areas for the development of the Russian collective investment market,” reports the press service of the Moscow Exchange. “They significantly simplify investment, especially for novice investors, of which there are more and more in the market. Transactions with exchange-traded funds are made by 1.3 million private investors each month (1.35 million in August 2021). We see that in recent months, management companies have been actively creating new funds for the assets that are most important during increased volatility in the market. Since May, six new funds – for gold, Russian stocks and bonds, and money market instruments – have appeared on the Moscow Exchange. In the future, the emergence of exchange-traded funds for Russian instruments denominated in Chinese yuan is likely.”
So far, as in the segment of open-end mutual funds, the usual stock and bond funds are in the majority among ETF. But more and more often, funds with other types of assets are being introduced to the Moscow Stock Exchange – such as precious metals funds, or monetary funds whose assets are placed in reverse repo with a central counterparty under OFZ and clearing certificates of participation.
For example, in late August–early September, three new ETF mutual funds began to be traded on the Moscow Exchange at the same time. Two of them are for gold – “Affordable Gold” and “Raiffeisen – Gold.” Both follow the dynamics of the price of gold (in rubles per gram) set on the precious metals market of the Moscow Exchange. The third fund, “INCOME Cbonds Corporate Bonds of the Russian Federation,” follows the Cbonds CBI RU Middle Market Investible index, which reflects the average market for liquid corporate bonds of the Russian Federation with credit quality from A+ to BB+ (inclusive) on the national scale.
“There was a boom in the growth of ETFs in Russia in 2021: the value of net assets exceeded 212 billion rubles, the number of funds was more than 125, and the number of shareholders 5.9 million people. But it will not be possible to repeat this, let alone improve on it, in 2022,” said Vadim Loginov, Director for Strategic Development of Alfa Capital Management Company. This is due to external reasons: a significant decrease in profitability, and the blocking of the part of the assets invested in foreign securities. Plus, the sharp increase in rates drew investor interest toward deposits.
“But many management companies are now already reorienting their line in favor of money market funds, gold, Russian assets, and new geographies of ‘friendly’ countries,” Loginov continues. “In addition, deposits with increased rates expired in September. If ETFs for Russian assets manage to show a more stable growth trend, then by the end of the year we can expect a positive dynamic of inflows into such funds.” According to the representative of Alfa Capital Management Company, the company’s plans for 2022 included the launch of a number of new ETFs, but external conditions have forced adjustments; now the priority is on funds for new geographies, while the commodities field and new currency funds (not dollar or euro) also look promising.
Also, with their growing popularity, investors can hope for a decrease in the commissions of ETFs – an important point, since with long-term investments every tenth of a percent matters. Vadim Loginov explains: each fund has certain infrastructure and management costs. Hence, the level of profitability of mutual funds starts from about 1 billion rubles. Therefore, only funds with a significant NAV can begin price competition and reductions.
Indeed, the gold and money market ETFs that have become more popular in 2022 have low commissions. In conclusion, it should be noted that the statistics of the Moscow Exchange on the most popular exchange-traded funds clearly shows how rationally they are used by private investors. In August 2022, the portfolios of individuals most often contained funds focused on defensive assets: gold and the money market, plus Russian shares.