See how ETFs help diversify investments – 10/22/2023 – Market

The key to being successful in investments is to diversify. But, for those who are not familiar with this world and do not have many resources available to apply, achieving this objective can be complicated. There is, however, an instrument that facilitates diversification, the ETF.

ETF is the acronym for the English term Exchange-Traded Funds which, in Portuguese, means funds traded on a stock exchange. They are similar to investment funds, but they do not have a basket of assets behind them, but rather a reference index, such as the one that follows American fixed income or the one that follows the price of cattle. It is the index managers who define the investment strategy and the ETF copies them. That’s why they’re called an index fund.

“It’s a simple way to negotiate a robust set of assets”, says Fernanda Feijó, an analyst at Sicredi.

Among the 96 national and international fixed and variable income ETFs that are listed on the Brazilian Stock Exchange, the best known and traded in Brazil are those that follow the Ibovespa, whose composition is defined by B3 every four months. From September until the end of this year, these are the shares of the main stocks in the index:

• Vale (14.56%)
• Petrobras (13.21%)
• Itaú (6.57%)
• Bradesco (4.62%)
• Eletrobras (4.40%)

Thus, when purchasing an Ibovespa ETF, 14.56% of the amount spent on it will be invested in Vale shares, 13.21% in Petrobras and so on. If the Ibovespa rises, the ETF has the same appreciation. Otherwise, he has the same fall.

Another advantage is that ETFs are much cheaper than funds. With R$11.82, you buy a share of the BOVX11 ETF, one of eight that replicates the Ibovespa. To build a portfolio with all 83 companies in the same proportion, it would be necessary to spend much more.

Furthermore, funds have an administration fee that is around 2% per year, while ETFs do not exceed 0.50% per year, as this is a passively managed fund, that is, it only copies the benchmark index.

Regarding Income Tax, variable income ETFs are subject to a 15% rate in case of sale at a profit, regardless of the value — unlike shares, which are exempt in case of gains of up to R$20,000. If it is a day trade (buying and selling on the same day), the IR is 20%. To collect the tax, the investor must generate a Darf guide (Federal Revenue Collection Document).

In the case of fixed income ETFs, the rate varies depending on the period for which you maintain the investment. If you pay within 180 days of purchase, 25% of the profit is taxed. Between 181 days and 720 days, the rate is 20%. After 720 days, it is 15%.

Another point of attention is liquidity. Most of them do not have a large trading volume, which can make trading difficult.

“If I’m trading these shares on the stock exchange, I have to have someone who wants to buy them at the price I would like to sell them”, says Fernanda, from Sicredi.

Until August this year, there were 50 million businesses. In 2022 as a whole, there were 92 million. But they are concentrated in a few ETFs, such as those linked to the Ibovespa, the Small Cap index —of companies listed on the B3 with smaller capitalization than those of the Ibovespa— and the S&P 500.

The most traded of all is BOVA11, which replicates Ibovespa, with R$128.6 billion traded from January to August 2023. The similar BBOV11, in turn, turned over just R$1.7 billion in the same period because it is less known.

To give you an idea, in just one day of trading on B3, shares move R$25 billion. Therefore, analysts say that, in addition to the ETF itself, it is necessary to analyze its trading volume.

Which ETF to buy?

Although still in its infancy, ETFs have advanced rapidly in Brazil. At the end of September, Nubank, in partnership with B3, launched the first of these with monthly dividend payments, NDIV11. It replicates the Ibovespa Smart Dividends B3 index, with companies that stand out for the volume of dividends paid to shareholders. As it is a profit distributed via ETF, it is subject to 15% taxation at source, unlike stock dividends, which are exempt.

Now, at B3, there are 83 variable income and 13 fixed income. With the expected fall in the Selic, currently at 12.75% per year, this disparity tends to decrease, analysts say.

Most of these fixed income instruments follow the performance of IPCA+ Treasury bonds. Thus, the higher inflation and future interest rates (contracts that reflect expectations about the future Selic), the more it tends to rise. Future interest, in fact, has its own ETF, FIXA11, which follows a three-year contract. There are also debenture ETFs, Selic Treasury and prefixed Treasury.

The last one is the favorite of Henrique Aguiar, manager of Nova Futura Investimentos. “The post-fixed interest rate will continue to fall, following the Selic,” he says. The market expectation is that the basic interest rate will reach 9% by the end of 2024.

Aguiar also recommends unusual ETFs, such as CORN11, which tracks the price of corn, and BBOI11, which reflects the value of cattle. “There is a very large asymmetry in the cattle market. Head prices went from R$350 to R$190 recently, which led producers to sell below their production cost”, says the expert.

Corn, used to feed livestock, with record production, was one of the factors behind this devaluation. With both commodities down, Aguiar sees upside potential in these ETFs.

Another recommendation from the manager are ETFs that track the Small Cap index, which is undervalued in relation to the Ibovespa.

But he issues a warning. “You have to be careful with what is in each ETF. People have to look into the details of how each of them works.”