Major U.S. exchange-traded fund companies are enthusiastically marketing their wares to Latin American pension funds, particularly in Chile where investors can allocate up to 80 percent of their pension contributions in foreign investments.
As Latin American countries have privatized pension systems, U.S. ETFs are proving attractive to local fund managers who want to invest more broadly outside the region, diversify risk and find products that carry lower costs than traditional mutual funds.
U.S. ETF providers see the Latin American pension market as an area of growth outside their saturated home market. Their products have met a favorable reception from national regulators for their relative simplicity and transparent structure.
"There's a lot of excitement around the region from a lot of investment managers," said Vanguard principal Dennis Duffy, who oversees Vanguard's Americas business outside of the United States.
New York-based WisdomTree Investments Inc. became the latest firm to expand in the region on Monday, when Chilean regulators approved three additional ETFs for sale to locally-based pension funds, bringing its total to 13 approved funds, according to the company.
"Given the interest we've seen by Chilean pension investors in U.S. equity funds over the last year, we are delighted," said Luciano Siracusano, chief investment strategist at Wisdom Tree.
Larger ETF players, like BlackRock Inc., Vanguard and State Street Corp. have long been active in those markets and have noted heightened enthusiasm.
At State Street, ETF assets under management in the region have grown nearly three-fold in three years, to $8.36 billion at the end of July, up from $2.94 billion in 2010, which may not include ETFs that Latin American managers have bought directly in the United States or on other exchanges. State Street includes Chile, Colombia, Mexico and Peru in its Latin America region.
Vanguard has been in Chile for more than a decade and has seen a shift in pension account interest away from traditional mutual funds toward ETFs, Duffy said in an interview.
BlackRock, which cross-listed its first iShares ETF in Latin America in 2004, has been expanding its iShares team in the region and now has roughly 70 people on the ground in the region, with about 30 additional staff members serving Latin American clients from abroad.
The number of iShares ETFs offered in countries in the region now top 150 individually in Mexico, Chile and Peru.
LATAM PENSION SYSTEMS ATTRACT ETFs
Chile's $163 billion pension pool is particularly attractive to U.S. ETF providers, because it is large, well established and allows a significant percentage of foreign investments. Workers there are required to contribute 10 percent of their monthly earnings to their individual accounts directed by pension managers.
Over the years, other Latin American countries have also adapted to the privatization of pension systems and are seen as promising ETF markets, said Kevin Quigg, global head of ETF sales strategy at State Street.
State Street is seeing a greater number of investors in the region turning to ETFs covering more targeted exposures, such as their SPDR S&P China ETF, whereas in the past, most trended to larger, broader ETFs, such as the Dow diamond and SPDR S&P 500 ETF.
"As more people are participating in the system itself, the menu and sophistication of options has grown," Quigg said.
The three newly approved WisdomTree funds were the WisdomTree SmallCap Earnings Fund, the WisdomTree MidCap Earnings Fund and the WisdomTree Japan SmallCap Dividend Fund.
WisdomTree, along with other U.S. ETF providers, must seek approval from the Comisión Clasificadora de Riesgo, the Chilean pension funds investment regulator, before being able to offer their ETFs to local pension investors.
"Regulators love the ETF structure," said BlackRock's Daniel Gamba, head of the iShares Americas institutional business. "They like the fact that they are highly regulated instruments that are transparent and have daily holdings."
LOOKING TO US FUNDS
Many Latin American investors turn to U.S. ETFs as a way to invest more broadly outside of their region, where only 38 exchange-traded products are locally domiciled in Latin America, according to BlackRock data.
Those ETFs in Latin America account for about $11.5 billion in assets, or roughly 0.5 percent of the overall global market, according to BlackRock. The United States, with the largest market share of 70.5 percent, by comparison, had 1,524 products with $1.6 trillion in assets.
"Latin American pension funds can't invest only in one region," said Aite Group emerging markets analyst Danielle Tierney, which explains why many of them turn to U.S. funds. "It's theoretically a way to diversify away risk," she said.
While Chile has been an early area of growth for many ETF providers, Richard Morris, a New York-based partner at Morgan, Lewis & Bockius LLP who works with exchange-traded fund providers in the industry, said he sees potential for sponsors to increase their diversification in other countries.
"Historically when people talk about making their products available in Central and South America, it's been in Mexico in Chile, but over the years, there's been an increased interest in expanding into countries like Brazil," Morris said, also mentioning Colombia and Argentina.
"All of these markets are growing as the markets for financial instruments have grown," he said.
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