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Shareholder Notice Related to the VanEck Russia ETF (RSX)

July 11, 2022

Read Time 4 MIN

Depository receipt fees are costing 20% or more of the Fund’s total value. Please request that banks waive their fees.

Although RSX’s listing exchange halted trading in RSX several months ago, the fund is still operational. As a result, the fund’s net asset value is still calculated every business day despite falling over 95%.1

We believe it is important to inform shareholders that the fees charged by the depository trust banks (Citibank, JP Morgan and Bank of New York) are significantly eroding the remaining assets of RSX.2

RSX invests in companies directly, whether listed in Moscow or New York, but the majority of the fund’s exposure prior to the Ukraine war was in the form of depository receipts. Depository receipts are trust instruments that represent stocks with a primary listing in a country where local custody or trading is difficult for international investors. Depository receipts are administered by banks and could be converted to local shares at an investor’s discretion. Depository receipts allowed investors such as RSX to more readily buy, sell and hold shares of foreign issuers, while generally providing superior liquidity over their locally listed counterparts.

As the Ukraine war started, liquidity in depository receipts went away quickly. Some Russian stocks were sanctioned, and some exchanges halted trading in non-sanctioned stocks and depository receipts. In other words, investors have not been getting the liquidity that they bought depository receipts for in the first place.

As noted above, RSX’s net asset value is being calculated every business day. This calculation considers the value of the assets held by RSX; namely, the Russian stocks held by the fund, whether they are Russian companies listed in Moscow, companies doing business in Russia but listed elsewhere, or depository receipts of local Russian stocks. The majority of these securities are valued at, or close to, zero. Most fund expenses have fallen in proportion to the decline in the fund’s net asset value.

However, one source of expenses has not fallen, and now represents a shockingly high percentage of fees paid by shareholders. The banks that charge depository receipt fees have not, despite being asked, reduced their fees.

Depository receipt holders like RSX can be charged the bank’s high depository receipt fees in two ways.

First, the banks have the ability to charge depository receipt holders annual fees for maintaining the depository receipt. These banks have not communicated whether they will charge or waive these fees, but some have already been charged. Based on RSX’s current net asset value, these fees comprise a large percentage of the assets of the fund. The fees banks charge receipt holders are not linked to the value of the receipts. Rather, they are a per-receipt fee. An example illustrates this best. If the receipt fees are, let’s say, 4 cents per share, and the receipt is $20, then the depository fees are only 0.2% of the Russian depository receipt’s total value. Relatively trivial. But if the Russian depository receipt falls to 1 cent per share, the receipt fees are 400% of the receipt’s value--way more than the value of the actual receipt. Based on the current value of the receipts held by RSX, namely, zero, the annual fees that the depository banks are charging bear no practical relationship to the value of the receipts. We estimate current annual fees to be $450,000 or 1.2% of today’s fund assets, or about twice the fund’s total expenses before the war. As the fund may continue to operate for years, depository receipt fees could materially erode the fund’s value over time. But this is only the first, smaller part of the depository receipt fees.

Second, the banks have the ability to charge a “conversion fee”. This fee arises when a receipt is converted to the underlying stock. Banks are charging shareholders a conversion fee, even when this action was forced by government sanctions and not requested by receipt holders. We estimate these fees for RSX to be approximately $7.2 million. This is 19% of the entire value of RSX, which currently stands at about $37 million. VTB Bank and Sberbank conversions were $2.2 million, and an expected Gazprom conversion is anticipated to be about $1.1 million. The total fees to be paid by RSX will be higher if more depository receipts are converted and the depository banks do not waive their fees.

While none of the preceding is new, what is new is that the world concerning the receipts held by RSX has changed. Investors in these receipts are not benefitting from the liquidity and features of these receipts that would justify paying the depositories. Investors, such as RSX and other funds and individuals that hold receipts, are being materially hurt by the banks’ fee. If current conditions persist, given the amounts of fees relative to the fund’s size, RSX may lose any opportunity to potentially recover its losses should market conditions change. Stated another way, the banks win and shareholders lose.

To that end, on behalf of all receipt holders, we are publicly calling on these banks to do the fair thing for receipt holders: waive all fees (including conversion fees) for any depository receipt listed on U.S. or U.K. exchanges.3 Receipt holders like RSX are not getting the benefits, like liquidity, that they are paying for. Moreover, many companies have voluntarily incurred billions of dollars of losses from ceasing business in Russia.4 We have also implemented a voluntary waiver of RSX’s management fee. We are asking the banks to be reasonable with their depository receipt fees as well.

If you are a current shareholder of RSX, please contact the investor relations personnel at JP Morgan, Bank of New York and Citibank if you agree.

DISCLOSURES

1 Please note that all data is true as of today, but may change materially over time. We will seek to update this statement on www.vaneck.com as facts change materially.

2 RSXJ is similarly affected.

3  We contacted the banks privately before posting this note.

4 See, for example, “Companies Find it Difficult to Leave Russia, Though Many are Trying,” June 21, 2022, Wall Street Journal.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

An investment in RSX may be subject to risks which include, among others, investing in Russian issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, basic materials sector, communication services sector, energy sector, financials sector, medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

An investment in RSXJ may be subject to risks which include, among others, investing Russian issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, basic materials sector consumer discretionary sector, financials sector, industrials sector, real estate sector, utilities sector, small- capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, issuer-specific changes, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.