Although last month’s news of a blockbuster deal between iShares and BlackRock dominated the headlines and was widely trumpeted as a “gamechanger” for the industry, the fund giant recently inked another deal that drew far less attention but may prove to be of far more long term importance for the ETF industry. Last week, iShares reached an agreement with Peruvian pension funds, known as AFPs, that may increase the assets of its MSCI All Peru Capped Index Fund (EPU) by as much as $300 million.
According to Gonzalo Presa, a pension fund manager at Lima-based AFP Horizonte, several funds will swap shares of stock in Peruvian companies for shares in EPU. “We’ll give Barclays shares to build up this ETF’,” said Presa. “The idea is to issue $300 million in new shares in two, three weeks.” Peru is home to one of the world’s best-performing stock markets this year, a trend that led iShares and Global X to develop ETFs focused exclusively on the Latin American nation (iShares beat its much smaller rival to the punch late last month). But despite the market’s tremendous performance, acquiring shares of the Peruvian companies comprising the ETF’s underlying index could be a difficult task due to the liquidity of the market. Average trading volume on the Lima stock exchange is about $22 million per day, compared to an average of $149 million for Chile according to Bloomberg. iShares’ Chilean ETF (ECH) and Brazilian ETF (EWZ) have market capitalizations of $315 million and $8.5 billion, respectively, compared to about $10 million for EPU.
A Big Step Forward
The relative lack of liquidity in Peruvian equities could make a large, freely-traded ETF very appealing to large investors. “Institutional investors find it hard to invest in the broader Peruvian market because there are only a few interesting names with some liquidity,” said Roberto Lampl of ING Investment Management. “There are certainly very few liquid companies compared with other markets like Mexico, Brazil, or China.”
Generally, new fund offerings from iShares and other fund issuers take a fair amount of time to gain traction and attract enough investment dollars to maintain a sufficient level of liquidity. But iShares deal with Peruvian pension funds indicates that major institutional investors are beginning to warm to ETFs, and highlights the advantages that can potentially arise. If iShares is able to complete the proposed deal with the pension funds, its Peru ETF would immediately become among the largest Latin America ETFs (not to mention the fact that it would become significantly more profitable from iShares’ perspective). In addition to expediting the marketing and distribution process, this deal indicates that traditional actively-managed mutual funds may be losing their stranglehold on institutional investors. While the advantages of ETFs have made them popular among retail investors, they are yet to make a meaningful dent in retirement portfolios, largely due to administrative limitations. It seems that it’s only a matter of time before large institutional investors fully embrace ETFs – and that time may be coming sooner rather than later.
Disclosure: No positions at time of writing.