U.S. exchange-traded funds moving into Latin American pensions


By Ashley Lau

NEW YORK, Nov 5 (Reuters) - Major U.S. exchange-traded fundcompanies are enthusiastically marketing their wares to LatinAmerican pension funds, particularly in Chile where investorscan allocate up to 80 percent of their pension contributions inforeign investments.

As Latin American countries have privatized pension systems,U.S. ETFs are proving attractive to local fund managers who wantto invest more broadly outside the region, diversify risk andfind products that carry lower costs than traditional mutualfunds.

U.S. ETF providers see the Latin American pension market asan area of growth outside their saturated home market. Theirproducts have met a favorable reception from national regulatorsfor their relative simplicity and transparent structure.

"There's a lot of excitement around the region from a lot ofinvestment managers," said Vanguard principal Dennis Duffy, whooversees Vanguard's Americas business outside of the UnitedStates.

New York-based WisdomTree Investments Inc becamethe latest firm to expand in the region on Monday, when Chileanregulators approved three additional ETFs for sale tolocally-based pension funds, bringing its total to 13 approvedfunds, according to the company.

"Given the interest we've seen by Chilean pension investorsin U.S. equity funds over the last year, we are delighted," saidLuciano Siracusano, chief investment strategist, at Wisdom Tree.

Larger ETF players, like BlackRock Inc, Vanguard andState Street Corp have long been active in those marketsand have noted heightened enthusiasm.

At State Street, ETF assets under management in the regionhave grown nearly three-fold in three years, to $8.36 billion atthe end of July, up from $2.94 billion in 2010, which may notinclude ETFs that Latin American managers have bought directlyin the United States or on other exchanges. State Streetincludes Chile, Colombia, Mexico and Peru in its Latin Americaregion.

Vanguard has been in Chile for more than a decade and hasseen a shift in pension account interest away from traditionalmutual funds towards ETFs, Duffy said in an interview.

BlackRock, which cross-listed its first iShares ETF in LatinAmerica in 2004, has been expanding its iShares team in theregion and now has roughly 70 people on the ground in theregion, with about 30 additional staff members serving LatinAmerican clients from abroad.

The number of iShares ETFs offered in countries in theregion now top 150 individually in Mexico, Chile and Peru.


Chile's $163 billion pension pool is particularly attractiveto U.S. ETF providers, because it is large, well established andallows a significant percentage of foreign investments. Workersthere are required to contribute 10 percent of their monthlyearnings to their individual accounts directed by pensionmanagers.

Over the years, other Latin American countries have alsoadapted to the privatization of pension systems and are seen aspromising ETF markets, said Kevin Quigg, global head of ETFsales strategy at State Street.

State Street is seeing a greater number of investors in theregion turning to ETFs covering more targeted exposures, such astheir SPDR S&P China ETF, whereas in the past, mosttrended to larger, broader ETFs, such as the Dow diamond andSPDR S&P 500 ETF, St

"As more people are participating in the system itself, themenu and sophistication of options has grown," Quigg said.

The three newly approved WisdomTree funds were theWisdomTree SmallCap Earnings Fund, the WisdomTree MidCapEarnings Fund and the WisdomTree Japan SmallCap DividendFund.

WisdomTree, along with other U.S. ETF providers, must seekapproval from the Comisión Clasificadora de Riesgo, the Chileanpension funds investment regulator, before being able to offertheir ETFs to local pension investors.

"Regulators love the ETF structure," said BlackRock's DanielGamba, head of the iShares Americas institutional business."They like the fact that they are highly regulated instrumentsthat are transparent and have daily holdings."


Many Latin American investors turn to U.S. ETFs as a way toinvest more broadly outside of their region, where only 38exchange-traded products are locally domiciled in Latin America,according to BlackRock data.

Those ETFs in Latin America account for about $11.5 billionin assets, or roughly 0.5 percent of the overall global market,according to BlackRock. The United States, with the largestmarket share of 70.5 percent, by comparison, had 1,524 productswith $1.6 trillion in assets.

"Latin American pension funds can't invest only in oneregion," said Aite Group emerging markets analyst DanielleTierney, 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 ETFproviders, Richard Morris, a New York-based partner at Morgan,Lewis & Bockius LLP who works with exchange-traded fundproviders in the industry, said he sees potential for sponsorsto increase their diversification in other countries.

"Historically when people talk about making their productsavailable in Central and South America, it's been in Mexico inChile, but over the years, there's been an increased interest inexpanding into countries like Brazil," Morris said, alsomentioning Colombia and Argentina.

"All of these markets are growing as the markets forfinancial instruments have grown," he said.

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