Brazil: An Update On Investing In Brazilian Exchange Traded Funds

Last Updated: 12 May 2011
Article by Walter Stuber

Brazilian Exchange Traded Funds (ETFs) are equity investment funds structured as open-ended funds that track indices traded on the Brazilian Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF). The incorporation, administration and operation of ETFs is governed by CVM Instruction No. 359, of January 22, 2002, issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM). The Portuguese expression used in Brazil to designate ETFs is Fundos de Investimento em Índice de Mercado (Market Indices Funds) or Fundos de Índice (Indices Funds).

The shares of an ETF are known as quotas (units). The units of the ETFs are traded on the BVMF just like shares1. When acquiring units in an ETF, the investor holds the entire range of shares in the linked or reference index (the Underlying Index) without having to buy separate shares in each company. In this manner, ETFs offer greater practicality, speed and flexibility when making an investment, as well as offering an easier tracking of performance, which is tied to the index in question. As with stock investments, in order to invest in an ETF the investor must go through a brokerage house that is authorized by BVMF2.

The reasons for investing in ETFs instead of buying shares directly are the following:

  1. fast and efficient investment in the Brazilian securities market: ETFs permit direct investment in several of the main Brazilian publicly-held corporations. The fund manager shall occasionally rebalance the portfolio in order to reflect changes to the composition of the Underlying Index, without any additional action or investment required by the ETF unitholders;
  2. investment diversification: ETFs grant their holders a means to diversified investment in the Brazilian securities market, as their Underlying Index is made up of shares from a wide range of Brazilian publicly-held corporations involved in different sectors of the economy;
  3. low administration cost: ETFs are a unique investment vehicle with a low administration cost. Their purpose is to track the performance of the Underlying Index, but without the operating costs, significant initial cash investment or constant adjustment responsibilities that would be required if investors wished to reproduce the performance of the Underlying Index individually.
  4. traded on BVMF as thought they were shares: ETFs are approved for listing and trading on BVMF and can be bought or sold in the same manner as any share traded on the Brazilian Exchange. As securities listed on BVMF, ETFs offer benefits that are not available to investors in unlisted investment funds. For example, investors can use ETFs as margin in transactions executed on BVMF in the same manner as other securities listed on the Brazilian Exchange. Furthermore, CVM and BVMF rules permit ETFs to be lent in market transactions. ETFs are traded on the spot, forward and options markets like shares. Only brokerage house clients can buy and sell units of ETFs. The same types of orders used for shares are used in ETF trading. ETFs are listed on the Brazilian Exchange and can be traded during the session. It is very easy for the investor to buy and sell them.

The minimum trading quantity for ETFs on the secondary market is a round lot, generally of 10 ETF units. Round lots can be traded singly or in multiples. The value in Brazilian currency (BRL) depends on the ETF, but anyone can begin investment at under BRL 200. Odd lot trading is also permitted, at a minimum of one unit. Any issue or redemption of ETF units should be in accordance with the minimum volumes established in the rules of each Index Fund.

The ETFs reflect changes to the portfolio of the Underlying Index. When the portfolio of the Underlying Index undergoes quarterly readjustments the manager shall accordingly readjust the composition of the ETF portfolio in order to reflect the new makeup. The manager shall also readjust the composition of the portfolio to reflect changes stemming from the distribution of proceeds by issuers in the Underlying Index.

The ETFs have sources of revenue. Revenue can be gained through lending ETF units and the individual shares that make up the portfolio, in accordance with the fund's rules.

Regarding permitted expenses, ETFs can only incur in the expenses covered by their rules. These include the administration fee, the annual contribution to BVMF, fees and commissions relative to the funds' transactions, expenses from the custody and settlement of the funds' transactions with securities, and fees and expenses from independent audits.

The cash redemption of ETFs is not permitted, but ETFs can be sold on BVMF like any other share. The redemption of ETFs is only permitted in units and must be in multiples of the Minimum Amount of ETF Units, specified in the rules of each ETF.

With respect to the fees applied for ownership or redemption of ETFs, the funds' rules of each ETF will establish whether or not there are fees for buying or redeeming ETFs.

ETFs can invest in assets other than shares in the Underlying Index, but always in accordance with the restrictions established in their rules. ETFs can put up to 5% of their equity into Permitted Investments, which are: (i) government securities issued by the National Treasury or by the Central Bank of Brazil (Banco Central do Brasil - Bacen); (ii) fixed-income securities issued by financial institutions duly authorized to operate by Bacen; (iii) Financial Investment Fund (FIF) participations; (iv) repurchase agreement operations, executed in accordance with the rules of the Brazilian Monetary Council (Conselho Monetário Nacional - CMN); and (v) transactions with derivatives carried out on stock exchanges, mercantile and futures exchanges or on the over-the-counter (OTC) markets.

The ETF trading price is not always the same as the Indicative Optimized Portfolio Value (IOPV). The reference price for ETFs may differ from the trading price on BVMF. The ETF trading price will be influenced by the reference price but also by supply and demand, which will vary based on market conditions and factors such as prospects for the shares that make up the ETF portfolio, investors' confidence, and expectations about the domestic and international economy. Meanwhile, mechanisms for the issue and redemption of ETFs help to keep the trading price similar to the reference price. It is to be expected that the investors will request the issue and redemption of ETFs whenever the trading price varies significantly from the reference price, but there is no guarantee that this will occur.

It is possible to redeem units of an ETF at any time, if the ETF holder has units that are multiples of the Ownership or Redemption Minimum Amounts.

To request the issue of new ETFs units, the investor will generally have to deliver the following to the fund manager, through the mediation of an Authorized Agent, the Minimum Purchase Amount (in accordance with the fund's rules) or a multiple of it, based on the fund's purchase basket of assets. The purchase basket of assets shall be have at least 95% of its value in shares in the Underlying Index and at most 5% of value in permitted investments or cash amounts

For redemption of ETF units, any holder may redeem ETF units on any trading day on BVMF, in Minimum Redemption Amounts or their round multiples. ETFs are redeemable through the fund manager delivering the following to the holder via an Authorized Agent, a portfolio of shares in the Underlying Index, or, as the case may be, a cash amount in accordance with the fund's rules.

Regarding the ETF policy about distributions of dividends and proceeds from the component shares of the Underlying Index, the calculation methodology for the Underlying Index assumes that any coupons, subscription receipts, share split certificates, dividends, interest on own capital, bonuses or other rights relative to shares in the theoretical portfolio of the Underlying Index shall be immediately reinvested in shares in the same index. This shall be to the same proportion as the composition of the theoretical portfolio of the Underlying Index, even if these distributions are not immediately paid or distributed. The fund manager shall as much as is possible use this methodology for the reinvestment of distributions paid, based on these shares composing the fund's portfolio.

The holders of ETF units can vote in the meetings of the companies whose shares make up the Underlying Index and they can borrow shares that are part of the theoretical portfolio of the Underlying Index and which are held by the fund, for the end of exercising voting rights in the general meetings of the respective companies. However, the number of units that the ETF unitholder can borrow shall be proportionate to the number of ETF units the holder has at the end of the day on which the request to borrow the shares is made.

In summary, the advantages of investing in ETFs are efficiency, transparency and flexibility in a single investment. ETFs are funds which mirror indexes and their units are traded on the Brazilian Exchange just like shares. When investors buy the units of any given ETF, they become holders of all the component shares of the Underlying Index which that ETF replicates without having to buy the shares of each company in the index separately. As a result, ETFs provide investors with a fast, efficient and practical investment opportunity which also facilitates their ability to closely follow the performance of their investment in the respective index. By investing in ETFs the investors are, at the same time, investing in a portfolio composed of different companies.

On May 5, 2011 BVMF announced the opening of the bidding process3 to select a securities portfolio manager entitled to an exclusive one-year license for the use of three new Underlying Indices: (i) the Dividend Index (IDIV), which measures the performance of shares in companies that are outstanding in terms of remuneration to investors, in dividends and interest on own capital; (ii) the Basic Materials Index (IMAT), which measures the performance of shares that most represent the packaging, wood and paper, miscellaneous materials, mining, chemicals, steel and metallurgy sectors; and (iii) the Public Utilities Index (UTIL), which measures the performance of shares in companies that represent the public utilities sector (electricity, water and sanitation, and gas). The component stocks are selected for their liquidity and weighted in the portfolio by the market value of stocks that are available for trading. Companies that issue Brazilian Depositary Receipts (BDRs) and companies in judicial reorganization or bankruptcy are not included in this universe. This is for the creation, respectively, of the Dividend Index Exchange-Traded Fund (IDIV ETF), the Basic Materials Index Exchange-Traded Fund (IMAT ETF), and the Public Utilities Index Exchange Traded Fund (UTIL ETF). The new products will have their units traded on the BOVESPA market segment.

The winning financial institution shall obtain the exclusive license for the use of these three new Underlying Indices to manage their respective ETFs for a period of one year. The only legal entities eligible to participate in the bidding process are those that have been authorized by CVM to perform professional securities portfolio management activities, and have or belong to an economic group that has, in Brazil and/or abroad, assets under management amounting to at least BRL 2 billion. The portfolio manager must also appoint the entity that will act as the investment fund manager, which will need to have assets under management amounting to at least BRL 10 billion.


1. According to the information announced by BVMF, ETFs reached a record BRL 942.43 billion financial volume in April of 2011, in 28,969 trades and 14,734,230 units. The financial volume figure surpassed by 7.5% the previous record of BRL 876.25 million, of February 2011. There was a 7.7% participation of individual investors in the total volume of ETFs in the same month of April. Institutional investors continued to lead, at 46.3%, followed by financial institutions (23.1%), foreign investors (21.8%) and public and private-sector companies (1.1%).

2. The parties involved in ETF transactions are the following: (i) the Stock Exchanges (in Brazil - BVMF) – which provides a platform for the listing, trading, settlement and custody of ETFs; (ii) fund portfolio managers – they are responsible for managing the fund´s portfolio and for replicating the performance of the underlying index; (iii) the fund managers – they are responsible for managing the fund and for creating/redeeming ETF units; (iv) authorized agents – the brokerage houses that create and redeem ETF units and maintain a direct relationship with the fund manager; (v) market makers – the brokerage houses that are continuously present in the market by providing bids and asks for at least a minimum lot of ETFs per bid/ask, subject to a certain maximum spread; and (vi) custodians – they ensure the safekeeping of ETFs and ETF component securities, as well as provide for the creation and redemption of ETF units.

3. VMF will receive documentation from the interested institutions up to June 13, 2011. The winning institution for each of the ETFs will be that which presents the greatest commitment of volume for the 12 months as of the date on which the units are admitted for trading, in the form of a proposal of minimum guaranteed exchange fees. This is defined as the sum total of trading, settlement and registration fees for cash, options and forward transactions involving IDIV ETF, IMAT ETF and UTIL ETF units carried out in the BOVESPA market segment. The announcement of the result of the bidding process shall be held in a session restricted to those participants that send proposals on June 28, 2011, as of 10.00 am at BVMF headquarters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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