What Rio’s Win Means For Brazil ETFs

by on October 5, 2009 | ETFs Mentioned:

On Friday afternoon, thousands of Chicagoans watched in stunned silence as the Second City, long thought to be the overwhelming favorite to be awarded the right to host the 2016 Summer Olympics, was the first city to be eliminated from contention.

Chicago’s loss turned out to be Rio de Janeiro’s gain. The Brazilian city beat out Madrid and Tokyo for the right to host the 2016 Games, becoming the first South American city selected to host the Olympics. As the final announcement was made, a Carnivale-esque party broke out in Rio’s famed Copacabana beach, as Brazilians rejoiced in their opportunity to showcase their cities and culture on a global stage.

Tale of Two Cities

Rio de Janeiro at NightChicago’s bid may have been done in by a lack of public support stemming from concerns over the potential for financial ruin if the city had been selected. Now attention turns to Rio, as investors begin to analyze the potential economic impact on the Brazilian economy over the next decade.

Only a handful of emerging markets have ever hosted the Olympic games, with mostly positive results. Seoul has thrived since being awarded the 1988 Summer Olympics, culminating in South Korea’s upgrade to “developed” status in 2008. But not all emerging host cities have been as successful. Mexico City failed to build upon the foundation laid by the 1968 Games, regressing into problems of crime, pollution, and corruption that still plague the city today. “In Mexico City, hosting the 1968 Olympics was a prelude to urbanization and poverty,” says Richard Kang, chief investment officer for Emerging Global Advisors. “In Seoul, it was a story of urbanization and prosperity.”

Beyond BRIC

For decades, Brazil has been one of the world’s most promising and fastest-growing economies. Since being tabbed for inclusion in the BRIC bloc of countries in 2001, Brazil has implemented a variety of market reforms that have eased investor anxiety over investing in Latin America’s largest economy. But many have been skeptical of Brazil’s ability to advance its economy to the developed level, believing that the country was destined to retain its emerging status indefinitely.

Now, the Olympics may provide an opportunity to take that next step.

Despite the considerable sports infrastructure built for the 2007 Pan-American Games, Rio will need to build venues from scratch, including an arena for diving and water polo. Several other stadiums will require significant renovations to meet minimum seating requirements.

On the transportation front, the city’s needs are more pressing. Rio has a population of more than 14 million, but lacks transportation infrastructure to link city’s hotels to the Barra de Tijuca area where most of the venues will be concentrated. The city has outlined a $5 billion plan to develop rapid-transit bus lines between Barra and the beachside neighborhoods of Copacabana and Ipanema.

Rio also needs to build several complexes including the Olympic Village that will provide some 25,000 of the 48,000 hotel rooms needed for the Games. Even with these facilities, the city still plans to provide a considerable amount of the total accommodation through cruise ships docked in the port areas of Rio. In order to clean up the polluted waters off the coast of Rio, the government plans to invest some $4 billion to clean up the venues for sailing and other water sports.

A Pre-Olympic Bull Market?

For all host cities, before any construction can begin, the necessary commodities must be procured. Brazil is one of the world’s most resource-rich nations, with huge deposits of various precious and industrial metals, as well as other materials required to complete the upcoming construction projects.

Brazil also has the energy resources to fuel a construction boom. After decades of severe energy shortages, Brazil has successfully carried out a green energy revolution. The country that once imported 85% of its oil is now a net exporter. Brazil relies on hydroelectric power to generate more than 80% of its energy needs and utilizes ethanol (or a gas/ethanol combination) to power 90% of the cars on the road.

After taking these initiatives, Brazilian oil company Petroleo Brasileiro reported the largest Western Hemisphere oil discovery in 30 years in offshore territorial waters in 2007. Brazilian president Luiz Inacio Lula da Silva called the Tupi field, which has potential recoverable reserves of 7 billion barrels, a “gift from God.” Brazil is ramping up its efforts to monetize these massive discoveries just as it begins the next step of planning billions of dollars of investment in the infrastructure of Rio.

It appears that Brazil’s old mineral wealth and new oil wealth may be converging at just the right moment.  “Fortunately for Brazil, in terms of materials and energy, they’ve got it,” says Kang. “They have all the pieces to put together a pre-Olympic bull market.”

Although significant questions remain (particularly over the frequency of violent crime), Rio seems to be well positioned to follow in the footsteps of Seoul, and avoid the fate of Mexico City.

ETF Plays on Brazil

While a number of emerging market and BRIC ETFs offer exposure to Brazilian equities, there are also several funds that focus exclusively on the South American nation:

  • Market Vectors Brazil Small Cap ETF (BRF): This ETF avoids exposure to many of the large cap companies that foreign investors may know, investing instead in smaller firms operating in Brazil. BRF offers minimal energy exposure, focusing instead on consumer products, financials, and industrials. BRF jumped about 1.5% on Friday following the announcement, and could continue to post solid gains in coming years if Brazil thrives in the Olympic spotlight.


  • iShares MSCI Brazil Index Fund (EWZ): Unlike BRF, this ETF has significant holdings in the energy sector (particularly in energy giant Petrobras) and materials sector, and is tilted towards large cap equities. EWZ surged nearly 2% following the announcement of Rio’s win Friday.


  • WisdomTree Dreyfus Brazilian Real Fund (BZF): Brazil’s currency has surged this year on signs of increased stability. If the Games go as the Brazilian government plans, the real could continue to climb as Brazil makes a case for an eventual upgrade to developed status.


Disclosure: No positions at time of writing.