A financial firm has asked regulators to approve what would be the first investment fund focused on companies doing business in Venezuela, arriving on the heels of major political changes in the South American nation.
The exchange-traded fund industry manages $13.6 trillion in assets across almost 5,000 different products. Now it may add another option targeting Venezuelan stocks.
Teucrium filed paperwork Monday with the Securities and Exchange Commission to create the Venezuela Exposure ETF. The proposed fund would follow an index tracking Venezuela-based businesses and companies that either keep more than half their assets in Venezuela or make over 50 percent of their money from operations there. This means the fund wouldn’t just buy stocks listed in Venezuela but would also include any company heavily involved in the country.
Political shift drives market surge
The filing came just days after the United States conducted a secret weekend operation to remove Venezuelan President Nicolas Maduro from power.
If approved, this would break new ground. While several funds currently hold Venezuelan government debt, information from Bloomberg Intelligence shows no existing ETFs attempt to give investors access to Venezuela’s stock market, which remains small with limited trading activity.
The Caracas Stock Exchange jumped 16.45 percent on Monday, building on recent gains.
Eric Balchunas, who analyzes ETFs for Bloomberg Intelligence, said the timing makes sense despite many unanswered questions about Venezuela’s future government and the real-world difficulties of investing there.
“It’s something that isn’t totally ETF-able. It’s a frontier country with no liquidity,” Balchunas explained. “This is the ETF industry being opportunistic and trying to take advantage of the moment.”
Debt restructuring hopes fuel optimism
Maduro’s removal sparked a sharp rise in Venezuela’s bond market. Long-term creditors are now wondering if this could finally lead to negotiations over the country’s debt burden. Venezuela quit making debt payments around eight years ago, and restructuring discussions have been virtually absent due to American sanctions.
The political shift has helped the limited number of ETFs holding Venezuelan debt. One example is the Virtus Stone Harbor Emerging Markets High Yield Bond ETF, known by its ticker VEMY, which started increasing its Venezuelan bond holdings roughly a year ago, according to portfolio manager Jim Craige.
Craige, who serves as chief investment officer at Stone Harbor Investment Partners, thinks a debt restructuring deal could happen within the next 18 to 24 months.
“The defaulted debt we own in the fund and across our strategies has increased significantly in price and it should continue to do so,” Craige said Monday on Bloomberg Television’s ETF IQ program. “It’s trading at 35 cents on the dollar, and the claim value is between one and a half and two times that. So you do a pretty simple restructuring, we expect a lot of value out of this.”
Even with positive feelings about Venezuelan debt, Balchunas thinks the potential customer base for a Venezuelan stock ETF is probably limited. However, it represents one of the rare unexplored areas for companies competing in the packed ETF marketplace.
Todd Sohn noted that such opportunities emerge when circumstances create possibilities for new investment options.
“Every now and then, an event or catalyst occurs and the industry realizes, no matter how small the gap or niche the matter, that there is potential for a new exposure,” Sohn said. “That’s evident here.“
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