The Russian ETF puzzle and its possible reasons

Abstract

This paper documents the Russian exchange-traded funds (ETF) puzzle. Since 2014-2015, most Russian fund-of-funds have been investing only in one preselected Western ETF. During that period, these funds have raised more money than any other fund category in Russia. However, if an investor buys shares in an ETF via a mutual fund (MF) rather than doing it directly, she overpays up to 36 of the invested capital over a 10-year horizon. Additionally, the paper provides a brief overview of possible reasons for this anomalous, suboptimal index investing behavior, and formulates hypotheses for further research.