Brazil ETFs: Big Returns Come In Small Caps

by on September 24, 2009 | ETFs Mentioned:

Since it was tabbed for inclusion in the BRIC bloc of countries in 2001, Brazil has been a popular choice for investors around the globe. The world’s fifth most-populous nation has seen tremendous economic growth over the last decade, bolstered by sound economic policies that have kept interest rates and inflation in check. A resource-rich country, Brazil has been successful in diversifying its economy in recent years, and now maintains developed agriculture, mining, manufacturing, and services sectors. The Latin American nation has become an increasingly important player on the world stage, as evidenced by recent pleas from president Luiz Inacio Lula da Silva to “re-found the world economic order.”

Sao Paolo, Latin America's Financial CenterSo it comes as no surprise that there multiple ETFs offering exposure to the Brazilian equities markets, or that the aggregate assets under management in these ETFs now exceeds $10 billion. Our ETF Screener shows two funds focusing exclusively on Brazilian equities (in addition to multiple BRIC ETFs). The iShares MSCI Brazil Index Fund (EWZ) is one of the largest and most heavily-traded ETFs available to U.S. investors, trading nearly 18 million shares daily. The Market Vectors Brazil Small-Cap ETF (BRF) is significantly smaller, but has become very popular among investors in the four months since its inception. BRF’s market cap now tops $270 million, a remarkable accomplishment for a fund that has been around for less than two quarters.

EWZ and BRF both offer exposure to Brazilian equities, but that’s where the similarities end. EWZ invests in mega-cap stocks and is tilted towards the materials and energy sectors, while BRF (not surprisingly) focuses on small cap equities and has heavier allocations to consumer products industries.

Expense Ratio 0.63% 0.73%
Holdings 65 47
Index Market Cap $606 billion $59 billion
Avg. Daily Volume 18 million 165,000
Largest Holding 7/10/2000 5/12/2009
Inception Date 7/10/2000 5/12/2009

Although Brazil’s economy has become increasingly diversified in recent years, the largest companies in the country are still primarily materials and energy companies. These two sectors account for more than half of the assets of EWZ, but less than 15% of BRF. Small cap companies in Brazil tend to be tilted towards consumer companies, which account for more than a third of BRF.

Sector AllocationsSo the big question is: how do the returns for these two Brazil ETFs compare? Since BRF has only been around since May, it missed out on the steep declines experienced in global equity markets over the last two years, making comparisons over an extended time period difficult. Since its launch, BRF has gained about 60%, and EWZ is up about 35%. By comparison, SPY, which tracks the S&P 500, has gained about 19% during that time period.

Disclosure: No positions at time of writing.