BRIC Options Against A Falling S&P 500

By Gregory S. Davis | September 30, 2008 AAA

Concerns surrounding the proposed U.S. bailout agreement in Congress are also being dealt with in European, Latin American and Asian markets. Investors exploring international countries for investment returns that are non-correlated to the U.S. market may be having a difficult time putting together their short list. The following reviews how BRIC ETFs performed recently, noting the importance of identifying the allocation being used in the underlying portfolio.

Foreign and Domestic Market Responses

On September 29, before the U.S. market opened, the London Stock Exchange FTSE was off -3.2% and Hong Kong's Hang Seng Index also fell 2.1%. The Standard & Poor's 500 Index dropped 8.8% and the Brazilian IBOVESPA SAO PAULO index fell 9.36% for the day after the bailout plan did not move through Congress. The SPDRS S&P 500 ETF (AMEX:SPY) returned -7.84%.

Back to the BRICs

Wall Street banking firm Goldman Sachs (NYSE:GS) notes that Brazil, Russia, India and China are among the fastest-growing economies in the world and have the potential to become the richest economies in the world by 2050.

Individual Pieces

At the close of trading on September 29, the iShares MSCI Brazil Index ETF (PSE:EWZ) dropped more than 15%, the Market Vectors Russia ETF (PSE:RSX) was down 16.54%, the iShares FTSE/Xinhua China 25 Index fell more than 14% and the PowerShares India ETF (PSE:PIN) fell 11.07%. While the long-term positive outlook for the BRIC countries remains intact, it also appears that the asset allocation to each country is an equally important factor to consider.

Claymore BRIC

The Claymore/BNY BRIC ETF (AMEX:EEB) returned -12.88% on September 29. At the end of August, the EEB ETF actually had more than 75% of its asset allocation tied to investments in Brazil and China, with more than 50% set aside for Brazilian companies like Petroleo Brasileiro (NYSE:PBR) and mining concern Companhia Vale (NYSE:RIO). Its top China holding is China Mobile (NYSE:CHL). Note that EEB is down 40% since the beginning of the year.

SPDR BRIC

The SPDR S&P BRIC 40 ETF (AMEX:BIK), which sounds similar in name to the BRIC ETF from Claymore, fell 13.45%. BIK had 39% exposure to China, 27% exposure to Brazil and 16.6% exposure to Russia as of the end of August. With top holdings including Russia's natural gas company OAO Gazprom (OTC:OGZPY), China Mobile and China Life Insurance (NYSE:LFC), BIK's overweight in China appears to have pushed the BIK BRIC down slightly further than the EEB ETF. BIK is also down 41.78% since the beginning of the year.

Final Thoughts

Investors curious about which foreign markets may offer non-correlated returns to U.S. markets must choose carefully. Investors should be prepared to stomach inherent volatility of international investments before choosing a BRIC for the future.

Read Go International With Foreign Index Funds to learn more about investing in funds that track foreign indexes.

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