XP Asset has announced the launch of XCAP11, a new exchange-traded fund focused on Brazil’s small-cap segment. The product enters a market where investors already have several small-cap ETF options, but with a methodology designed to address what the firm considers weaknesses in traditional benchmark construction.
According to Leonardo Vasques, Portfolio Manager at XP Asset, the ETF tracks an index developed in partnership with B3 with the goal of improving how companies are added to and removed from the small-cap universe.
Vasques argues that traditional small-cap indices often lose exposure to companies just as they enter a stronger phase of growth.
“In the B3 small-cap index, there is a problem: when a small-cap company starts growing significantly, it quickly leaves the small-cap category, becomes a mid-cap, and exits the index. As a result, investors miss a large part of that appreciation phase.”
He also noted that companies entering the index after significant declines can be incorporated with substantial weights, creating what he described as a form of adverse selection.
Methodology Designed to Smooth Portfolio Transitions
The key differentiator of the index tracked by XCAP11 is its gradual approach to portfolio rebalancing. Instead of removing companies immediately after they exceed small-cap thresholds, the index phases them out over time.
According to Vasques, stocks leaving the index due to appreciation are removed in stages over approximately one year.
“A stock that is leaving because of appreciation does not exit immediately. One-third leaves in the first four-month period, another third in the second, and only after a year does it leave completely.”
The same process applies to companies entering the index after falling in market value. XP Asset says this approach results in lower portfolio turnover, which can help reduce transaction costs within the ETF structure.
Management Fee and Securities Lending Revenue
The fund was launched with a management fee of 0.30% per year, positioning it among the lower-cost options within the Brazilian small-cap ETF segment.
XP Asset also highlighted the potential contribution of securities lending revenue. Under Brazilian ETF regulations, lending income generated from holdings is returned to the fund, benefiting investors.
“When we look at an equity ETF in Brazil, all the revenue generated from lending the portfolio’s shares is returned 100% to the ETF.”
As an example, Vasques cited the firm’s Ibovespa ETF.
“In our Ibovespa ETF, BOVX11, we have generated more than 4% of cumulative excess return over the Ibovespa over five years solely from securities lending.”
According to the manager, lending rates for small-cap stocks tend to be higher, potentially creating an additional source of return for investors.
Targeting Improved Performance Relative to Traditional Small-Cap Benchmarks
XP Asset says that backtested data provided by B3 indicates the new index outperformed the traditional small-cap benchmark by roughly 2.5% annually.
“According to B3 data, this new index outperforms the traditional small-cap index by around 2.5% per year.”
While historical simulations do not guarantee future performance, XP Asset believes that the combination of a revised methodology, lower turnover, and securities lending revenue may offer investors a differentiated way to gain exposure to Brazil’s small-cap market.
Watch the full interview with Leonardo Vasques about the new launch from XP Asset
