iShares Plans LatAm Bond ETF

May 21, 2012

New iShares ETF Takes aim at relatively untapped Latin American bond space.

iShares, the world’s biggest exchange-traded fund firm, filed regulatory paperwork to bring to market a dollar-denominated fund comprising Latin American corporate and sovereign debt, bringing competition to a part of the bond world that’s not very well traveled.

The new iShares LatAm bond ETF will compete with the $7.27 million Market Vectors LatAm Aggregate Bond ETF (NYSEArca: BONO), which was launched almost a year ago and comes with a 0.49 percent annual expense ratio. iShares didn’t list an expense ratio or a ticker in its filing.

Emerging markets, especially those in Latin America, are slowly becoming attractive to U.S. investors looking for relatively high yields compared with those in the U.S. and Europe. Also, Latin American countries have benefited in recent years from strong sovereign balance sheets and disciplined monetary policies.

In October 2010, WisdomTree filed paperwork for a Latin American debt fund that would target Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay and Venezuela. It appeared at the time to be an attempt to replicate the success of WisdomTree’s broad emerging markets debt ETF, “ELD,” but the LatAm ETF has yet to launch.

So far, multiregion emerging market funds have had significantly more success.

ELD, the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD), is an actively managed ETF with about $1.22 billion in assets, according to IndexUniverse’s fund flows tool. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), an index fund, has $739.4 million in assets.

Perhaps the slow asset gathering of Van Eck’s “BONO” reflects that investing in Latin America doesn’t come without risks, include capital controls that would “seal up” money inside a country and affect foreign investors—an approach Brazil deployed last year to slow its fast-growing economy.

How The Index Works

The iShares Latin American Bond Fund will use a sampling strategy, meaning, for example, it wouldn’t hold all 308 credits that were in the Barclays index at the end of April.

The issuers in the Barclays index must have a minimum of $300 million par amount outstanding.

Securities rated “non-investment grade” and domiciled in a nonemerging market country will need to have a minimum of $150 million par amount outstanding.

Conversely, securities rated “non-investment grade” and domiciled in an emerging market country must have a minimum of $500 million par amount outstanding.

Also, corporate issuers must have at least $1 billion of aggregate par amount outstanding.

Warrants, convertible securities, private placements, separate trading of registered interest and principal securities, and inflation-linked bonds are excluded from the underlying index, the filing said.

At the end of April 30, the underlying index comprised issuers from the following countries: Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Panama, Peru, Trinidad, Uruguay and Venezuela.

The five highest-weighted countries were Brazil, Mexico, Venezuela, Colombia and Chile.

Component issuers include sovereign and quasi-sovereign entities and industrial companies, and may change over time, according to the prospectus.

The fund will concentrate its investments—that is, hold 25 percent or more of its total assets—in a particular industry or group of industries, which may include large-, mid- or small-capitalization companies, the filing said.



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