All Eyes On Brazil ETFs

by on October 29, 2009 | ETFs Mentioned:

Over the last two years, a slew of financial and economic crises have caused many U.S. investors to reexamine traditional asset allocation strategies that put the vast majority of their assets into U.S.-listed securities. As these investors have looked to move beyond their borders, Brazil has been one of the most popular destinations, identified as an emerging market candidate likely to continue along the path to developed status.

BrasiliaFor investors looking to gain exposure to Brazil, two of the most efficient options have been the iShares MSCI Brazil Index Fund (EWZ) and the Market Vectors Brazil Small-Cap ETF (BRF). While these products both offer exposure to Brazilian equities, they are more different than alike, focusing on completely different parts of the economy. This leads to a very different risk and return profile, as evidenced by year-to-date share price performances.

Over the last year, EWZ and BRF have both trended sharply upwards, spurred by strong demand for natural resources and increasing demand for consumer products within Brazil. But these ETFs have his a rough patch in the last weeks as concerns about the sustainability of the global recovery have spooked some investors away from emerging market investments. Between mid-May (when BRF was launched) and last week, EWZ had gained about 54% and BRF was up more than 85%. But both funds have plummeted in recent sessions, dropping 10% or more in the last 3 days.

BRF Has Outperformed EWZ By A Wide Margin In 2009

These sharp declines are due primarily to regulatory and external factors rather than weakness in the Brazilian economy. Last week, the government implemented a 2% tax on foreign investment in an effort to prevent the currency from appreciating too quickly against the U.S. dollar.

Comparing Brazil ETFs

As the names of these funds (and the above table) suggest, there is very little overlap in the holdings of these funds. EWZ focuses primarily on mega cap and large cap companies (energy giant Petrobras accounts for more than 20% of total holdings), while BRF invests exclusively in small-cap firms.

Holdings 64 57
Index Market Cap. $789 billion $86 billion
Return 5/14 – 10/23 54% 87%
Return 10/23 – 10/28 -10% -12%
Expense Ratio 0.63% 0.73%

While this leads to a difference in the size of underlying holdings, it also produces a sharp contrast in sector exposure. As shown below, BRF is tilted more heavily towards the consumer discretionary and industrials sectors, while maintaining no exposure to energy companies.

Sector EWZ BRF
Materials 27.6% 12.3%
Energy 26.0% 0.0%
Financials 19.8% 16.7%
Consumer Staples 7.7% 5.0%
Utilities 7.3% 6.5%
Telecom 4.0% 4.9%
Consumer Discretionary 2.6% 30.8%
Technology 2.4% 3.4%
Industrials 2.1% 17.3%
Health Care 0.0% 3.1%

Many investors clearly remain bullish on Brazil, as these ETFs have started to rebound after the irrational selloffs that occurred earlier in the week.

Disclosure: No positions at time of writing.