ETFs: fuelling the Latino powerhouse

Despite outflows from emerging markets earlier this year, demand for exposure to Brazil remains robust as investors seek to gain from rising energy prices. Paul Burgin reports

Investors are still enamoured with the emerging markets story, but less so than they were for much of last year. Although broad EM indices sufficed in 2010, investors now want specific exposure to individual countries.

According to BlackRock data, there are eight ETFs and ETPs with primary listings in Latin America with a pure Brazil focus.

The largest collection belongs to iShares and is listed on the exchange in São Paulo. The range covers the whole market, including specific sectors such as property or consumption, and a range of market caps. Local bank Banco Itaú also covers the IBrX-50 and local financials index.

Locally listed products have seen demand ebb and flow recently, although investors have pulled out $300m year-to-date. The largest local products by AUM are the iShares Ibovespa Fundo de Índice and the Itaú 50 stock tracker. Total local assets stood at US$2.8bn in pure Brazilian plays.

Local interest
ETFs listed in Brazil are typically aimed at local investors. Discussions are under way with the local regulator, which forbids local distributors trading in non-Brazilian domiciled funds. Such a move to change this would allow other Brazil ETF providers into the market and give local investors more choice of other popular global and country specific indices.

Yet until the regulator opens up the market, investors must contend with vehicles listed elsewhere. They have committed substantial sums to Brazilian trackers listed outside of the country, including funds domiciled in the United States and Dublin. Primary or secondary listings can be found in Madrid, Paris, London, Stockholm, Frankfurt and as far away as South Korea.

Products either track the local Bovespa index or the broad MSCI Brazil index. The only two products to offer investors an alternative are the Acción FTSE Latibex Brasil on the Madrid Exchange and the EasyETF DJ Brazil 15.

Ben Johnson, director of European ETF research at Morningstar, says global investors have a fairly good choice of broad index providers. He counts 10 unique funds that global asset allocators can look to for Brazil exposure, from providers such as Lyxor and Source.

It is likely more specialist products will be created, along the lines of the São Paolo sector and cap specific vehicles, as institutional demand deepens. Johnson says: “Ultimately we will see more slicing of the market, with a move into specialist exposure in IT, healthcare, telecom, consumer staples and discretionary. We should also see a move down the cap scale.”

For now, much of the interest in Brazil is fuelled by the commodity theme. The MSCI Brazil index is weighted 23.89% towards energy stocks. Materials make up a further 23.84%. Two single firms also dominate. Local oil firm Petrobras makes up over 20% of the whole index, with miner Vale constituting almost 17%. With so much of the market and index committed to two firms, Brazilian ETFs can be volatile.