American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Feb. 2022 – Russia, Emerging Markets, and Risk Management

Investors who own emerging markets funds have a portion of their wealth exposed to the Russian stock market. Here we quantify that exposure and describe the risk control methods employed by our favored emerging market equity funds.

Emerging market stocks, like all stocks, bear risk. These risks are wide ranging and might include perils such as national disasters, pandemics, and exchange rate risk. Our first line of defense against such risks is broad diversification. For example, the Vanguard Emerging Market Stock fund (VEMAX) seeks to track the performance of the MSCI Emerging Markets Index. VEMAX holds 4,415 companies domiciled across 25 countries. On December 31, Russian equities represented 3.61 percent of the overall MSCI Emerging Markets Index.

We also list the DFA Emerging Markets Core Equity ETF. Diversification is the primary tool employed for mitigating risk in this fund as well. But the fund takes risk management a step further. Its managers will curtail its exposure to certain markets when investors’ ability to trade in specific stocks or on certain exchanges, is at risk. This can include the recent, sweeping sanctions against Russia. As recently as 2014 DFA reduced the fund’s exposure to Russia following the annexation of Crimea. As of December 31, the fund listed 6,449 stocks held among 25 countries. Russian equities comprised only 1.0 percent of the fund’s total holdings.

Both of these funds stand in contrast to “actively managed” funds. Risk management within active funds often relies on the opinion of the portfolio manager rather than on rules based on sound theory and empirical research.

Investors who want exposure to emerging markets should seek out well-diversified funds and limit their exposure consistent with guidance found in our quarterly review of capital markets.

Also In This Issue

Markets And Global Crises
New RMD Tables In 2022
Lesser-Known HSA Benefits
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles