The Exchange Traded Funds In Brazil

The Exchange Traded Fund (ETF), also known as tracker, is an

example of a rapid success story in the international

market1. This vehicle combines the diversification of a

mutual fund with the flexibility of a stock. In Brazil an ETF

(Fundo de Índice Negociado, in Portuguese) is an

investment fund constituted under the applicable regulations of the

Brazilian Securities and Exchange Commission (Comissão

de Valores Mobiliários – CVM), i.e. CVM

Instruction No. 359, of January 22, 20022. A Brazilian

ETF is structured as an open-ended fund, with units (quotas) traded

on the stock market. An ETF is authorized for trading at

BM&FBOVESPA (the main Brazilian Stock Exchange) like any other

stock3, and its objective is to track the performance of

a specific market index4.

To this end, the ETF's portfolio replicates the

composition of its reference index in accordance with certain rules

set forth by the applicable regulations in force which establishes

the portfolio's minimum limits of exposure to the securities

that form its underlying index. Generally, in order to request the

creation of a new ETF, the investor must deposit with the fund

manager, via an authorized agent, one or more creation quotas

composed by the fund's basket of stocks (the portfolio). The

composition of each portfolio must be as follows: (i) at least 95%

of the total value of the portfolio, by stocks that make up the

underlying index; and (ii) at most 5% of remaining value, by other

permitted investments such as government bonds, banking

certificates of deposit (CDBs), investment funds quotes, repos,

stocks that do not make up the index and cash.

The parties involved in ETF transactions are the following: (i)

the Stock Exchanges (in Brazil - BM&FBOVESPA) – which

provides a platform for the listing, trading, settlement and

custody of ETFs; (ii) fund portfolio managers – they are

responsible for managing the fund's portfolio and for

replicating the performance of the underlying index; (iii) the fund

managers – they are responsible for managing the fund and

for creating/redeeming ETF quotas; (iv) authorized agents

– the brokerage houses that create and redeem ETF quotas

and maintain a direct relationship with the fund manager; (v)

market makers – the brokerage houses that are

continuously present in the market by providing bids and asks for

at least a minimum lot of ETFs per bid/ask, subject to a certain

maximum spread5; and (vi) custodians – they

ensure the safekeeping of ETFs and ETF component securities, as

well as provide for the creation and redemption of ETF quotas.

On December 2, 2008, Barclays Global Investors (BGI), one of the

world's largest asset managers and ETF providers, launched in

Brazil a family of three IShares Index Funds, which are the first

ETFs approved by CVM, with initial portfolios totaling about R$ 100

million in assets. All these funds are managed by Banco Barclays

S.A. (the fund manager) and track three different indexes: (i) the

Bovespa Index (IBovespa), which holds the 66 most-traded stocks on

BM&FBOVESPA; (ii) the BM&F Bovespa Mid-Large Cap Index,

which holds 69 stocks representing the top 85% of the market

capitalization on the São Paulo Exchange (adjusted for

liquidity); and (iii) the BM&F Small Cap Index, which holds 71

companies representing the bottom 15% of the exchange's

market cap.

The ETF reflects the changes in its underlying index portfolio.

Whenever such index is rebalanced based on the 4-month

re-compositions the manager will adjust the fund's...