Brazil Brings End to Tax on Foreign Bond Buyers, Removes What Had Been a Key “Disincentive,” Says Market Vectors’ Fran Rodilosso

Fri Jun 7, 2013 2:35pm EDT

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Brazil Brings End to Tax on Foreign Bond Buyers, Removes What Had Been a Key “Disincentive,” Says Market Vectors’ Fran Rodilosso

On Tuesday, Brazil’s Finance Minister officially eliminated a tax that affected foreign bond buyers. This followed a number of developments on the international finance stage over the last several months, including a reduction in capital flows into Brazil. “I believe this change should be viewed as a positive one for investors, though they should still cast a somewhat critical eye on the country’s efforts to improve its economic situation,” said Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.

“This tax had indeed been a disincentive for shorter-term plays in domestic Brazilian bond instruments,” said Rodilosso. “It has also likely slowed outflows from longer-term holders, as portfolio managers that sold Brazilian issuances may have decided not to repatriate the currency, leaving reals in their local accounts so as not to have to pay the tax again when they decided to buy more bonds.”

Rodilosso added, “It is important to note that this move does not necessarily represent a liberalization of the Brazilian real. Though the tax on foreign fixed income flows is now at zero percent, it could be raised again. The country is still expected to use capital controls as it deems fit, and other taxes, such as a one percent tax on dividends, still remain.”

“I interpret the decision to move this tax from six to zero percent in a single move as a key sign that Brazil’s government and central bank remain highly concerned about inflation, which is already above target and is being compounded by a weakening real,” Rodilosso added.

“Still, the end of the tax is good news for investors looking to add exposure to local currency funds,” continued Rodilosso. “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.”

Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY), Investment Grade Floating Rate ETF (NYSE Arca: FLTR), LatAm Aggregate Bond ETF (NYSE Arca: BONO) and Renminbi Bond ETF (NYSE Arca: CHLC). As of March 31, 2013, the total assets for these ETFs amounted to approximately $1.9 billion.

About Market Vectors ETFs

Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $26.1 billion in assets under management, making it the fifth largest ETP family in the U.S. and ninth largest worldwide as of March 31, 2013.

Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $35 billion in investor assets as of March 31, 2013.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.

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