Russia-Ukraine Tensions and the Impact on ETFs - February 2022

After months of escalating tension, Russia launched a full-scale invasion into Ukraine on Thursday, which sent markets into turmoil. As an illustration of the heightened unease, market indicators, such as the VIX Index and various credit spread indicators, remain elevated.

Feb. 28, 2022

What Happened?

  • After months of escalating tension, Russia launched a full-scale invasion into Ukraine on Thursday, which sent markets into turmoil. As an illustration of the heightened unease, market indicators, such as the VIX Index and various credit spread indicators, remain elevated.
  • While not a NATO member, but a partner country,” Ukraine may be allowed to join the alliance sometime in the future. Existing NATO-member countries have supported Ukraine through donations and implementing sanctions on Russia, in order to retaliate without having to impose physical force. However, various scenarios exist that can cause NATO allies to be drawn in, increasing their involvement and leading to a conflict with much broader implication.
  • This adds further complexity to the markets, which already faced many uncertainties, due to concerns about inflation, central bank monetary policy tightening and the ongoing COVID-19 pandemic.

VIX Index

Source: Bloomberg, February 9, 2022 to February 242022.

Markit CDX Emerging Markets Index

Source: Bloomberg, February 9, 2022 to February 242022.

Brent Crude Oil (US$/Barrel)

Source: Bloomberg, February 9, 2022 to February 242022.

Impact on the Market

At present time, it is difficult to determine the longer-term impact on the market. Some of the sanctions imposed on Russia are more immediate, while others will take time to take effect. Additionally, a response from Russia – either physical or non-physical – will result in different reactions by NATO countries. This is a quickly evolving event, with new information being priced into the market on an ongoing basis.

While the longer-term outlook remains uncertain, investors should focus on the following items.

  • Central banks tightening of monetary policy: In addition to quantitative tightening (QT), a number of G7 central banks, including the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC), are expected to make their first interest rate hikes since the pandemic. Multiple rate hikes have been anticipated for the calendar year; however, if the conflict continues or escalates, the path towards higher rates will be slower than many anticipate.
  • Ongoing inflation: With consumer price indexes (CPI) in Canada and the U.S. running far higher than their long-term target rates, both the BoC and the Fed have been well behind the curve. If the ongoing conflict limits how much the BoC and the Fed can tighten monetary conditions, inflation can continue to run unchecked.
  • Higher energy prices: Russia is a large exporter of oil to the global economy, and natural gas to many European nations. While President Biden has spared placing sanctions on Russia’s oil exports, Russia can limit its own output as a means of retaliation. With energy already in short-supply, the U.S. is expected to release oil from its own strategic petroleum reserve (SPR), with other nations shipping Liquified Natural Gas (LNG) to Europe. This will further exacerbate the demand-and-supply equilibrium, as North American demand is expected to increase, and Germany is now holding off on greenlighting the Nord Stream 2 pipeline.
  • The Re-opening 2.0: There are positive signs that suggests the pandemic is drawing to a close. With many countries beginning to treat COVID-19 as endemic, mandates are being dropped and economies may now look to reopen. After two years of ongoing lockdowns, the pent-up demand could further disrupt already stressed supply chains and just in time” inventory management.

What to Expect from ETFs:

  • Wider bid-offer spreads: The bid-offer spreads are a reflection of the underlying constituents of an ETF. With greater uncertainty in the markets, stocks, bonds and other assets will trade with a wider bid-offer spread, and as such, these wider spreads will be reflected in the ETF. Those ETFs that provide international exposure may also trade at wider spreads to reflect the impact of currency volatility. As already mentioned, the bid-offer spreads of an ETF are a reflection of the underlying assets.
  • One of the many benefits of ETFs is that they provide exposure to international markets during the investor’s local trading hours. For those ETFs that trade when the underlying market is closed, expect spreads to widen, as it will be more difficult for market-makers to establish a fair value. ETFs will continue to be an efficient tool for investors to gain intraday liquidity during times of market volatility.
  • Ongoing liquidity: In previous times of crisis, ETFs have proven to provide liquidity with elevated volumes, as buyers and sellers use ETFs to gain efficient access to the various exposures. Using the March 2020 pandemic crisis as an example, both the BMO S&P/TSX Capped Composite Index ETF (ticker: ZCN) and the BMO Aggregate Bond Index ETF (ticker: ZAG) experienced much higher volume in the month of March 2020, compared to the average volume they experienced in all of 2020.
PeriodBMO S&P/TSX Capped Composite Index ETF (ZCN)BMO Aggregate Bond Index ETF (ZAG)
Average Volume in March 20201,686,9002,221,175
Average Volume in All 2020732,7121,300,342
March 2020 Volume vs 2020 Volume230.23%170.81%

Source: Bloomberg.

When placing trades for ETFs, investors should keep the following best practices in mind:

  • Use limit orders: Limit orders allow investors to have a safeguard while placing trades. Investors should keep in mind that a limit order can be placed as aggressively or conservatively as an investor wishes.
  • Consider the time of the day: During periods of heightened volatility, markets tend to be more erratic at the beginning and end of the trading session, as new information is being digested by the market. If possible, investors may want to avoid trading right near the open and close of the session, as well as periods where the underlying market is closed.
  • Call your ETF provider or in-house ETF trade desk: Investors can call the BMO ETF trade hotline at 18777417263 in order to better source liquidity, increase the size offered on the bid and gain insight on where to place a limit order.

ETFs to Consider:


  • BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ) BMO Equal Weight Oil & Gas Index ETF (Ticker: ZEO): With the global transition towards renewable energy, very limited capital expenditure has been dedicated towards traditional fossil fuels. With many countries already running at capacity, demand was already outstripping supply prior to the Russian invasion of Ukraine.
  • BMO Covered Call Technology ETF (Ticker: ZWT): The technology sector tends to be sensitive to higher interest rates, given some of the companies tend to be less mature. Investors can take advantage of the recent sell-off by focusing on the larger cap, more cash-rich technology companies, and monetizing volatility in the sector through a covered call overlay. The distribution yield on this ETF is 5.2%.1
  • BMO Premium Yield ETF (Ticker: ZPAY) and BMO Premium Yield ETF (Hedged Units) (Ticker: ZPAY.F): This ETF will hold a combination of T-bills and stocks, while selling both call and put options. High volatility means investors will collect bigger premiums through options sold, while also providing a systematic way for investors to buy low and sell high” though the put and call options respectively being exercised. This ETF has a distribution yield of 6.5%.1

Fixed Income:

1 BMO Global Asset Management and Bloomberg, as of February 24, 2022. Distribution yield is not an indicator of overall performance yields will change from month to month based on market conditions and is not guaranteed. See below for the full disclaimer.

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