Brazil’s Oil Wealth: Three ETFs To Watch

by on September 3, 2009 | ETFs Mentioned:

For many Americans, the idea of “reducing our dependence on foreign oil” seems like an enormous undertaking. Decades after the push for developing green energy sources began, little progress has been made. The spectacular failures (remember the ethanol experiment?) have far outnumbered the mild successes. Solar power technology has improved by leaps and bounds, but it still hasn’t been proven as financially viable, and the U.S. trails badly behind China and Japan in the race to become the world’s dominant player. Although there is seemingly a Prius on every street corner, rising gas prices hurt just as much as ever.

Sao Paolo, The Financial Center of Latin AmericaMaybe we could learn a thing or two from Brazil. Following severe energy shortages more than 30 years ago, Brazil has successfully carried out a green energy revolution. The country that once imported 85% of its oil is now a net exporter. The Latin American nation (and potential Olympic host) relies on hydroelectric power for more than 80% of its energy needs and utilizes ethanol (or a gas/ethanol combination) to power 90% of the cars on its roads.

So it is somewhat ironic that in 2007 state-run Petroleo Brasileiro SA reported the largest Western Hemisphere oil discovery in 30 years in offshore territorial waters. Nearly two years after the discovery, Brazil is reforming its oil laws under a plan intended to divert a significant portion of the country’s oil wealth towards improving education systems and combating poverty. President Luiz Inacio Lula da Silva is currently pushing a plan that would speed up development of the oil deposits to jumpstart the efforts to improve living conditions in South America’s largest country.

Similar to the procedures implemented in Iraq earlier this year, the Brazilian government plans to auction off exploration and production blocks, with the winners determined primarily by the amount of oil they are willing to grant the government. Winning bidders are also expected to make an upfront payment that will be directed towards a social investment fund.

This is a critical point in Brazil’s development. Since the nation depends very little on oil to power its infrastructure, proceeds from the Tupi discovery (and other smaller discoveries made since) are essentially a windfall for a country that has experienced rapid economic growth, but is still plagued by problems common in emerging markets, such as sub-par social services, political corruption, and widespread poverty in certain areas.

Although Silva has called the discoveries “a gift from God,” the discovery does not guarantee that Brazil’s next step will be an easy one. Countless other nations have fallen victim to the “resource curse” in the past, done in by political infighting, reckless policies, and deep-rooted corruption.

Three ETF Plays On Brazil’s Oil Wealth

As a member of the BRIC bloc, Brazil is included in a number of emerging markets ETFs (use our Free ETF Screener to see the complete list). In addition to these funds, there are a few ETFs that offer unique exposure to Brazil and certain sectors of its economy:

  • Market Vectors Brazil Small-Cap ETF (BRF): BRF is a relatively new ETF, having been launched in May of this year (sign up for our Free ETF Newsletter to stay up to date on all new ETF launches). This ETF focuses on smaller companies listed in Brazil, and maintains a significant allocation to consumer discretionary equities, a sector that could benefit from a plan to distribute the country’s oil wealth more evenly.


  • iShares MSCI Brazil Index Fund (EWZ): EWZ offers diversified exposure to the Brazilian equity markets, and is one of the largest and most liquid international ETFs available. EWZ has been one of the best performing ETFs this year, gaining more than 60% so far in 2009. For investors looking for broad exposure to Brazil equities, EWZ is the best pure play option available.


  • PowerShares Global Emerging Markets Infrastructure (PXR): This ETF invests in equities of several emerging economies, but maintains a significant allocation to Brazil (9% of holdings). PXR is one of only a handful of ETFs to offer exposure to specific industries outside the U.S., focusing exclusively on companies engaged in infrastructure construction. Although education seems to be the first priority for Brazil’s government, improvements to the infrastructure of the country figure to be high on the priority list as well. If the government finds itself with cash to spend, Brazilian equities could give this ETF a boost.


Disclosure: No positions at time of writing.