Today marks another development in the emerging market ETF boom; Global X, the New York-based firm that burst on to the ETF scene with sector-specific China ETFs, is now tackling the Brazilian market. Two weeks after debuting the Brazil Mid Cap ETF (BRAZ), Global X announced today the launch of the Brazil Consumer ETF (BRAQ). This ETF joins the Brazil Infrastructure Index Fund (BRXX) as the only funds offering targeted exposure to sectors of the Brazilian economy, providing additional options for investing in one of the largest and most unique emerging economies [see all ETFs in the Latin America Equities ETFdb Category].
BRAQ tracks the Solactive Brazil Consumer Index, a benchmark designed to reflect the performance of Brazil’s consumer sector. The ETF will track at least 20 companies and at most 40 companies in Brazil. BRAQ has the highest weights in the food and beverage (34%), retail (25%), and personal and household goods (19%) sectors. Among the largest index components are beverage firm AmBev, food company JBS, and cosmetics firm Natura Cosmeticos. “Brazil is the largest Latin American country by GDP, area, and population. Projections for private spending are favorable, thanks to the trends over the past half decade of rising real wages and disposable income, and falling unemployment,” says Bruno del Ama, CEO of Global X Funds. “The Global X Brazil Consumer ETF provides efficient access to these trends.”
Interest in emerging markets has surged over the last couple years as the growth gap between advanced and developing economies has widened considerably. Brazil has become a particularly hot investment destination, thanks in part to two upcoming opportunities to showcase itself on the global stage; the country is set to host the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro. As these major sporting events near, the country has dedicated significant resources to improving its infrastructure [see BRXX Surges On Infrastructure Plan].
Among the BRIC economies, Brazil has frequently been the most active due to its significant natural resource wealth and strong trade relations with Asia. The most abundant natural resources include beef, poultry, pork, coffee, orange juice, sugar, and tobacco, and Brazil is a major exporter to the developing economies of Asia as well.
Brazil’s major oil deposits allow the country to benefit from energy independence and its copious agriculture shields the populace from spikes in food prices. As the country has become a bigger player on the global economic stage, its middle class has become significantly larger and wealthier; Brazil has seen a decline in fiscal debt and unemployment with an increase in real wages and disposable income. The rising minimum wage has reduced the amount of poverty in Brazil, contributing to the increase in consumer spending. The consumer sector is swelling, playing a significant role in the growth of Brazil’s economy.
What’s Missing In The Large Cap?
By far the most popular Brazil ETF is the iShares MSCI Brazil Index Fund (EWZ), which has total assets of nearly $10 billion and trades more than 20 million shares daily. Because EWZ focuses on the largest and most liquid securities traded on Brazilian exchanges, it maintains a bias towards the sectors that tend to include the companies with the largest market capitalizations; energy, financials, and industrial materials account for more than three quarters of total assets, with consumer goods (7%) and consumer services (less than 1%) receiving minimal weighting.
So for investors who want “pure play” exposure to the local Brazilian economy, EWZ isn’t necessarily the best option; big weightings to oil giant PetroBras and mining firm Vale make the fund dependent on raw material demand from overseas. By focusing on the consumer, BRAQ offers exposure to a sector that could thrive if Brazil’s middle class continues to expand and accumulate wealth. For investors looking to achieve well-rounded exposure to Brazil (or to emerging markets in general), BRAQ could serve as a complement to mega-cap funds that tend to be dominated by energy and financial firms.
Disclosure: No positions at time of writing.