Investing In Brazil Through ETFs

By Matthew McCall | November 28, 2011 AAA

Stock markets around the globe are struggling to keep their head above water in 2011, as the European debt crisis looms. One country that in the past has been able to outperform its peers is Brazil. This year that has not been the case, as the country's stock index, the BOVESPA is down 20% through mid-week.
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The sell-off in Brazil has created an opportunity for value investors willing to look outside the U.S. Based on an absolute price-to-book ratio Brazil has a reading of 1.47, below the U.S. (2.01) and less than a basket of GEM (global emerging market) countries. What is even more telling is that the Brazil reading is the same as it was at the 2008/09 low. The U.S., for example is, still well above the low mark of 1.46; a 38% premium. Based on the numbers, Brazil is a value today.(For related reading on the price to book ratio, see Using The Price-To-Book Ratio To Evaluate Companies.)

Brazil Asset Class ETFs
The largest Brazilian ETF is the iShares MSCI Brazil ETF (NYSE:EWZ), with over $9.1 billion in assets. The ETF is composed of 85 stocks with the majority in the financials, materials and energy sector. Fees are 0.61% annually and EWZ currently has a 30-day SEC yield of 3.7%. Year-to-date, the ETF is lagging the overall Brazilian market with a loss of 29%.

Global X Funds introduced the Brazil Mid Cap ETF (NYSE:BRAZ) in June 2010, and year-to-date the ETF is down 26%. The ETF is composed of 43 stocks and has $20.3 million in assets. There is currently no dividend distributions and the ETF charges an expense ratio of 0.69%. The ETF is heavily invested in utilities, financials and industrials.

Investors who want to go small, have the Market Vectors Brazil Small Cap ETF (NYSE:BRF). The little guys have been hit the hardest this year, falling 31% in 2011. The ETF is made up of 62 stocks with the largest concentration in consumer discretionary, industrials and financials. The expense ratio is 0.59% and there are no dividend payments, as of yet.

Sector ETFs
Global X and EG Shares offers three niche ETFs that focus on specific sectors within the Brazilian stock market. The largest of the three is the EG Shares Brazil Infrastructure ETF (NYSE:BRXX). The ETF is holding up better than its peers, with a loss of about 18.5% year-to-date. A total of 30 stocks compose the ETF that charges a 0.85% expense ratio, with a dividend yield on the index of 4.7%. This is a play on the building that is planned, in anticipation of the World Cup and Olympics, both coming to the country in the next five years.

The Global X Brazil Consumer ETF (NYSE:BRAQ) and Global X Brazil Financials ETF (NYSE:BRAF) have struggled to attract assets with $26.5 and $5.2 million, respectively. They have also lagged BRXX with returns of -25% for BRAF and -28% for BRAQ.

The Bottom Line
The smaller the companies that make up the ETFs, the more likely they will rely on the Brazilian economy, versus the global economy. This, in turn, makes the ETFs that are composed of small and mid cap stocks a more direct play on the rise of Brazil. In my opinion, the country of Brazil will offer a better opportunity in the coming year than the global economy and, therefore, would concentrate on BRAZ and BRF as investment choices. (For related reading on mid cap stocks, see How To Analyze Mid-Cap Stocks.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.
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