Brazil preps its first government bond ETF

WASHINGTON, Oct 7 (IFR) - Brazil is working with the World Bank to create its first emerging market exchange traded fund comprised of local government debt, a Brazilian government official told IFR.

“This will be the first ETF (of this kind) and at some point it should start attracting foreign investors as well,” Jose Franco Medeiros de Morais, the country’s subsecretary of public debt, told IFR on the sidelines of the IMF meetings in Washington.

The move reflects local investors’ preference for bonds over stocks, helping the government further develop its domestic capital markets.

In general, ETFs have become a popular investment vehicle for investors because they allow them to invest in a diverse collection of assets rather than single names. Also, stocks and bonds can be packaged in specific asset-class ETFs and traded on exchanges.

“Only a small percentage of the population invest in stocks, but they love fixed-income,” said Medeiros. “And I expect fixed-income ETFs to become very popular in Brazil.”

The government will select a manager for the ETF over the next several months, choosing from a list of international and local candidates, and will launch the product early next year.

The World Bank has a pilot program to develop such products in the emerging markets, but Brazil’s is likely to be first among several countries working on local government bond ETFs, he said.

The ETF will trade on the local stock exchange and is expected to replicate the inflation-linked government bond index created by ANBIMA, Brazil’s financial and capital markets association. (Reporting by Davide Scigliuzzo and Paul Kilby; Editing by Jack Doran)