Emerging markets local currency bond ETFs get a boost from Brazil

Jun 13th, 2013 | By | Category: Fixed Income

Last week, Brazil’s Finance Minister, Guido Mantega, officially eliminated a tax that affected foreign buyers of Brazilian government bonds. The move comes after a marked reduction in capital flows into Brazil.

Emerging markets local currency bond ETFs get a boost from Brazil

The elimination of the financial transaction tax on Brazilian government bonds should provide a boost to emerging markets local currency bond ETFs.

The tax was originally introduced as a defence against hot-money flows from developed markets seeking higher returns in Brazil, forcing up the real, the local currency. Recent weakness in the currency has brought about the reversal.

The elimination of the tax represents positive news for exchange-traded funds (ETFs) with exposure to Brazilian government debt. And while there isn’t yet a pure-play Brazilian government bond ETF on the market (WisdomTree has plans for a Brazilian bond ETF), a number of funds are set to benefit, most notably those that provide access to emerging markets local currency debt.

These funds, of which Brazil is often a large constituent, were previously subjected to the tax, making it a material component of the entry cost in the primary market to access ETFs.

Fran Rodilosso, fixed income portfolio manager at Market Vectors and manager of the Market Vectors LatAm Aggregate Bond ETF (BONO), said: “The end of the tax is good news for investors looking to add exposure to local currency funds. Inflows into ETFs and mutual funds that hold domestic, local currency Brazilian bonds will no longer be subject to that 6 percent tax on the portion of such fund’s holdings that invest in these instruments. On that front, Brazil’s decision is a welcome move.”

Eleanor Hope-Bell, head of SPDR ETFs in the UK, added: “We welcome this recent announcement from Brazilian Finance Minister, Guido Mantega to remove the financial transaction tax (IOF) on its government-issued bonds. Going forward, any new investors to this asset class should experience improved cost of ownership; and as a result, we expect to see improved flows and liquidity into ETFs that have Brazilian government exposure.”

European listed ETFs set to receive a boost include the Pimco EM Advantage Local Bond Index Source ETF (EMLB), the iShares Barclays Capital Emerging Market Local Govt Bond ETF (SEML), the Lyxor ETF Emerging Markets Local Currency Bond (DR) UCITS ETF (EMBD), the SPDR Barclays Capital Emerging Markets Local Bond UCITS ETF (EMDL) and the recently launched SPDR Barclays EM Inflation-Linked Local Bond UCITS ETF (SYBI).

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