Overview
The Issue-Driven Exchange Traded Fund (ID ETF) is an investment product with significant potential to support the development of domestic capital markets in Emerging Market Economies (EMEs). Specifically, the product can help enhance competition, as well as access, transparency and liquidity in the financial system. It allows local currency debt to be packaged into the ETF format, a format that is powerfully appealing to investors and that has enjoyed remarkable growth, especially in more advanced economies. The Bank developed the ID ETF concept upon identifying unexploited synergies between ETFs and the role they could play in supporting domestic debt market development.
The key innovation of the ID ETF Program is the direct involvement of a supporting entity – typically a public sector institution working to develop the local currency bond markets. This supporting entity’s role is very much dependent upon the market requirements of the relevant jurisdiction. At a minimum, the structure contemplates that the supporting entity will ensure a pre-agreed amount of underlying securities in the primary market. There may also be other mechanisms for the supporting entity to facilitate secondary market liquidity as needed depending on the degree of development and liquidity in each market. The ID ETF Program structure is flexible to accommodate varying degrees of support from the supporting entity, but a critical component of the product is an initial market needs assessment with each supporting entity such that it can be appropriately tailored for each jurisdiction while addressing the key constraints for a more developed local currency bond market and the economic viability of ETFs.
What We Do
The World Bank is ideally positioned to clear the path for the creation of emerging market debt ETFs. As a development bank, it recognizes the economic needs and concerns of governments and the necessity for debt products to be tied to development goals. Also, its convening power brings together the network of resources needed to build and support the product.
The ID ETF initiative serves as an example of the work that the World Bank does in assisting client countries in developing deep and resilient capital markets. The ID ETF represents a cross-cutting approach to capital market development across several building blocks of development: providing solutions for long-term financing for strategic sectors, helping create an enabling legal and regulatory framework, providing risk management tools and promoting financial stability. Furthermore, the initiative is important for the World Bank because of the role in supporting domestic bond markets globally as part of the organization’s mandate to promote economic development and alleviate extreme poverty.
The World Bank conceived the ID ETF product and designed the mechanics for the launch and implementation. Moreover, the Bank will add value to the initiative in the following ways:
1. Conducting a feasibility study on the viability and appropriateness of the product and assessing context-specific development impact
2. Providing technical assistance to assist countries in addressing critical bottlenecks to market development and meet the minimal standards needed for a successful ID ETF product over its life, thereby equipping the client countries with technical knowledge/tools and enhancing credibility
3. Increasing the profile of and demand for ID ETF products by consolidating the ID ETF as a global brand
4. Supporting the replication to other countries or asset classes as deemed appropriate for the development of financial markets in EMDEs
5. Facilitating dialogue across market participants and governments
Results
Inaugural ID ETF Program in Brazil: The World Bank launched its ID ETF program in collaboration with the Brazilian Treasury, the entity responsible for Brazil’s federal public debt management. Brazil's Issuer-Driven Exchange Traded Fund, called IMAB-11, was launched on the Brazilian stock exchange on May 20, 2019. It reached a total size at launch of approximately $500 million, making it the first of its kind and the largest fixed-income ETF in Latin America. Managed by Brazil's Itau Asset Management, the inaugural ID ETF was distributed to 2,100 institutional and retail investors. For approximately 700 investors, this was the first time ever investing in the Brazilian stock exchange.
The IMAB-11 ID ETF was the first fixed-income ETF in Brazil and has provided the impetus for the launch of other fixed-income ETFs. Six months after its launch, two ETFs were launched in India that use some inspiration from the ID ETF program. The Bharat bond ETFs comprise ETFs that invest in the constituents of the Nifty BHARAT Bond Index. The index contains debt securities of several government organizations, expanding on the single issuer structure in Brazil.
While it is still too early to evaluate all aspects of the Brazil ID ETF, it has already provided clear indications of supporting industry growth, investor access, lower costs, and greater competition in the asset management industry.
Global Expansion: The World Bank has the capacity to support this program globally by leveraging its technical expertise and global network to conduct feasibility analyses on the viability of the product for different markets, tailoring the product to the specific context and development needs of each economy.