The war in Ukraine and your portfolio

“Barring unforeseen circumstances”. Vladimir Putin certainly shocked the world with his invasion of Ukraine. I don’t want to add much more to what’s already been said on the geopolitical and humanitarian aspects, except to say that I’m also appalled by this shameless act of war and the suffering it is causing. I fully support the people of Ukraine and all people, Russians included, who are being oppressed by Putin’s regime and want to see it end.

As this is a site about investing, I will talk about the war’s potential implications from that perspective. For most investors, the direct impact to their portfolio should be small. Among the measures Western countries took to put pressure on Russia, they blocked investing in Russian securities likes stocks, bonds and the currency, the ruble. Holdings in Russian investments became instantly officially worthless (most had already plunged down to next-to-worthless following the invasion). But if you’re like most investors and you invest mostly in basic passive ETFs or mutual funds, only a very small proportion of your investments were Russian. For example, the BMO MSCI Emerging Markets Index ETF (symbol ZEM on the Toronto Stock Exchange) and the Vanguard FTSE Emerging Markets All Cap ETF (symbol VEE), two of the largest ETFs in Canada that focus on stocks from emerging markets countries, had less than 4% of their assets in Russian stocks as of December 31, 2021. When it comes to bonds, emerging markets-focused index ETFs like the US-based Vanguard Emerging Markets Government Bond ETF (VWOB) and the Canada-based BMO Emerging Markets Bond Index ETF (ZEF) had between 3% and 8% of their assets in Russian bonds. In the context of a diversified portfolio, if emerging markets-focused fund are, say, 10%-20% of your portfolio, then your Russian exposure is around 1%. However, outside of basic index funds, your mileage will vary. Some types of index funds are more complex and use different methodologies, like weighting stocks by their dividends instead of their market size, to figure out what to invest in. And when it comes to active funds, which are at the discretion of (hopefully skilled) professional investment managers, these may or may not have had a lot of investments in Russia. Therefore, talking with your advisors is important to figure these out.

However, while this direct impact to you should hopefully be small, a bigger impact from this war is what it could do to the global economy. Both Russia and Ukraine are major exporters of several resources, like energy, metals, and agriculture products. The prices of several of these commodities soared as supply chains were even more severely disrupted by the conflict. Some economies will feel the effects more than others. Germany’s over-reliance on Russian gas was exposed and the country is looking to diversify its sources as quickly as possible. That will take time and the Germans will likely have to live with significantly higher energy prices for a while. Higher prices are a global phenomenon. Japan, another country I follow more closely than most, is a large importer of resources. Already Japanese lawmakers are talking about an economic stimulus package to help deal with the impact of higher prices on the population. All told, there is a greater danger that the global economy will enter a recession and this will hurt the value of your investments. However, a recession has not appeared in the data yet. March preliminary economic figures remains moderately high in several countries. Consumers and businesses are worried though about the future, as indicated by lower confidence levels in surveys. For now, since there still isn’t a recession, I am still recommending staying in riskier assets and weathering the storm. My strategy has always been to wait for actual information before making a change. But I’ll be looking out for signs of trouble in various markets.

Sample portfolio for a Canadian investor

Asset class	ETF ticker	Weight
Canadian stocks	VCN	7.50%
US stocks	VUN	37.50%
Foreign stocks	VIU	30.00%
US corporate bonds	ZSU	2.50%
Canadian corporate bonds	XSH	2.50%
Global high yield bonds	MHYB	10.00%
Emerging markets bonds	ZEF	5.00%
Global real estate	TGRE	5.00%
Canadian mortgage-backed bonds	ZMBS	0.00%
Canadian government bonds	CLF	0.00%
Global government bonds	XGGB	0.00%
Gold	KILO	0.00%

Sample portfolio for a US investor

Asset class	ETF ticker	Weight
US stocks	SCHX	37.50%
Non-US stocks	SCHF	37.50%
US corporate bonds	SPIB	2.50%
Non-US corporate bonds	PICB	2.50%
US high yield bonds	SPHY	5.00%
Non-US high yield bonds	IHY	5.00%
Emerging markets bonds	VWOB	5.00%
Global real estate	REET	5.00%
US mortgage-backed bonds	MBB	0.00%
US government bonds	VGSH	0.00%
Non-US government bonds	BWZ	0.00%
Gold	GLDM	0.00%