WisdomTree (WETF) is quickly surging up the total AUM charts, thanks to some recent success. This has largely been driven by a huge level of demand for its Japan hedged fund, DXJ, and investors’ desire for exposure to this surging product.
Beyond this success, the fund company has also seen a great deal of interest in many of its other international products, which comprise a big chunk of the firm’s offering. This trend looks to be continuing thanks to some recent SEC filings that seek to expand WisdomTree’s lineup in the Brazil ETF market.
The New York-based firm recently offered up initial plans for two innovative products targeting the emerging South American giant. While many details weren’t available in this preliminary filing—such as expense ratios or ticker symbols—we have highlighted some of the key details about the two proposed funds below:
WisdomTree Brazil Low Volatility Equity Fund
This proposed product looks to offer up exposure to the WisdomTree Brazil Low Volatility Equity Index. This benchmark looks to zero in on 50 Brazilian firms that have low volatility and high quality characteristics (read Is It Time to Buy the Brazil ETF?).
The stocks included must have a minimum market capitalization of at least one billion dollars and minimum average volumes of at least $2 million a day. The benchmark is also volatility weighted annually, giving bigger weights to companies that have lower historical volatility.
It should also be noted that the fund seeks to cap the single weight to any one security to 3%, and the max to any one sector at 25%. This should help to keep the portfolio well spread out among the component stocks, and prevent a heavy concentration in a single industry as well.
If this fund is ever approved, it could be an interesting choice for investors seeking to play Brazil large caps, but with a tilt towards safer stocks. This could be very important, as the market can exhibit high levels of volatility and produce big losses (or gains) in short time periods, making this proposed fund an interesting alternative for some investors (see Will Brazil ETFs Rebound in 2013?).
WisdomTree Brazil Bond Fund
This proposed ETF looks to take a different approach to Brazil investing by instead focusing on fixed income securities. It also seeks to use an active methodology, intending to provide investors with a high level of total returns, consisting of both income and capital appreciation.
The ETF seeks to invest in a variety of Brazilian fixed income securities, including government bonds, quasi-sovereigns, and corporate bonds. There also appears to be no limit for the credit quality, so both investment grade and junk securities will be included in the ETF.
Investors should also note that the fund seeks to buy bonds that are both denominated in reals or in U.S. dollars, so there will be some degree of currency risk. However, interest rate risk may be minimal, as the fund looks to have a portfolio duration of between two and ten years, under normal market conditions (see 4 Best ETF Strategies for 2013).
This fund, if ever approved, could thus be an interesting choice for investors seeking a new fixed income play with an emerging market focus. There are several regional products out there, but this would be one of the first to zero in on a particular nation (outside of the U.S.) and give broad bond exposure, potentially diversifying some fixed income-heavy portfolios.
In terms of competitor funds already on the market, there are a few with Brazil exposure. In the bond world though, there isn’t much in the way of competition except for the Market Vectors Latin American Aggregate Bond ETF (BONO).
The ETF only has about one third of its bond exposure in Brazilian bonds, as another 30% goes to Mexico, and then 11% to Colombia. Beyond this fund though, there isn’t much in the way of Brazil bond ETF choices, so the proposed fund could see some decent inflows if ever approved (also see iShares Files for Latin America Bond ETF).
The real test will be if the proposed low volatility ETF can offer up a better level of exposure than heavily-concentrated products like EWZ. If this is the case and a decent level of volume follows, we could see some inflows, especially if some outperformance is seen in this possible new entrant in the ever-popular Brazil ETF space.
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