2 ETFs That Help Investors Avoid Sanctioned Securities

The persisting conflict in Ukraine has led to a rise in demand for sanctions screening and compliance services. Industry experts are keeping a close tab on potential additions to sanctions lists, particularly under the Trump administration, according to Reuters.

The SIX Sanctioned Securities Monitoring Service (SSMS), a branch of the SIX financial services and stock exchanges group, has observed a notable increase in the utilization of its services. The service evaluates over 10,000 ETFs and has found that 7.7% of them contain securities sanctioned by one or more governments. In addition to this, there has been a 700% growth in the number of sanctioned securities over the past couple of years.

Sara Nordin, a partner at law firm White & Case, thinks that proactivity is required in compliance. “With sanctions, to some extent, you have to try to predict the future,” she said, according to Reuters.

Considering Nordin’s advice, and for investors seeking ETFs with minimal exposure to sanctioned securities, broad-based funds that regularly rebalance based on compliance measures could be ideal. Here are two of them:

Vanguard Total Stock Market ETF VTI – Tracks the CRSP U.S. Total Market Index, reducing exposure to restricted foreign securities. With an expense ratio of 0.03%, it invests about 35% of its assets in the technology sector, including the big tech firms. The entire portfolio is predominantly made up of stocks of U.S.-based companies.

SPDR S&P 500 ETF Trust SPY – Tracks the S&P 500 Index, as its name suggests, and has an expense ratio of 0.9%. The ETF is focused on U.S. large-cap stocks, limiting exposure to sanctioned entities.

The Background

The SSMS indicates that the majority of ETFs holding sanctioned securities are domiciled in China, the U.S., and Ireland, respectively. However, this does not necessarily imply that these ETFs are violating domestic regulations, Reuters reports.

For instance, the U.S. recently expanded its blacklist of Chinese companies with alleged military ties, leading to the removal of certain telecom firms from global indices. Nonetheless, domestic investors in Hong Kong or China are still permitted to invest in these companies.

Oliver Bodmer, senior product manager at SIX Financial Information, told Reuters, “Assessing exposure in ETFs is complex, and vigilance is just as paramount for issuers as it is for brokers and other investors.”

Different regulations across different jurisdictions further complicate this process. Bodmer advises that ETF issuers must remain vigilant about securities sanctioned within their own jurisdiction and those of their target investors.

Similarly, investors need to ensure compliance by not investing in funds that hold sanctioned securities beyond authorized limits, which differ by jurisdiction and sanctions regime.

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