American investors looking to add international stocks to their portfolios can do so by purchasing shares of American Depository Receipts (ADR). These shares trade on U.S. stock exchanges and are priced in dollars, yet they represent shares of the foreign company. ADR prices tend to move in tandem with their foreign counterparts.

While adding exposure to international equities can add the benefits of diversification and the potential for higher portfolio returns, each individual company and the country within which it operates carries unique risks and circumstances that must be carefully considered. (For more, see: Understanding The Risk In The BRICs.)

Brazilian ADRs

Of particular interest are companies in Brazil. The Brazilian economy has been growing rapidly and diversifying, however it still relies heavily on its stock of natural resources and therefore may be impacted by sharp moves in the price of commodities. Brazilian debt markets may be less stable than developed markets as people ponder the risk of sovereign default, as Argentina did recently. (For more, see: Investing In Brazil 101.)

Allocating a portion of international stocks to a portfolio can help augment return while reducing overall risk in a portfolio if the correlation between the two markets is less than one. Modern portfolio theory teaches that diversification benefits a portfolio as the correlations of the assets held in it diverge, meaning the less that asset prices move in tandem the greater the benefit. Correlations close to 1.0 would indicate that the prices of those assets move largely in the same direction by the same magnitude at the same time, while correlations close to 0.0 would indicate that there is no statistical relationship between the price movements of the assets.

Since 2009, the correlation between the broader U.S. and Brazilian stock markets has been +0.70, meaning that it offers some diversification potential, but generally these two markets move in line with each other.

American investors looking to gain exposure to Brazilian companies might consider the following ADRs, ranked by market capitalization:

Company Ticker Industry Market Cap (USD$ billions)
Ambev SA ABEV Consumer Goods, Beer & Beverages 95.05
Itau Unibanco Holding ITUB Finance, Banks 74.48
Banco Bradesco BBD Finance, Banks 59.57
Vale SA VALE Metals & Mining 42.72
Telefonica Brasil VIV Telecommunications 19.99
Ultrapar Participacoes UGP Oil & Gas 11.1
TIM Participacoes TSU Telecommunications 10.98
Companhia Brasileira de Distribuicao CBD Retail 10.64
CPFL Energia CPL Utilities, Electricity 7.08
Embraer SA ERJ Aircraft & Aviation 6.63
Companhia Energetica Minas Gerais CIG Utilities, Electricity 6.62
Fibria Celulose SA FBR Paper Products 6.61
Gerdau SA GGB Industrial Manufacturing 6.41
Braskem SA BAK Chemicals 4.87
Companhia de Saneamento Basico SBS Utilities, Water Treatment 4.82

Source: BNY Mellon, data as of 12/5/2014

Exchange Traded Funds (ETFs) that track the broader Brazilian stock market or track the Brazilian real (BRL) are also tradeable on U.S. Stock markets:

Description Ticker
iShares MSCI Brazil Index ETF EWZ
Market Vectors Brazil Small Cap ETF BRF
Emerging Global Shares INDXX Brazil Infr BRXX
Global X brazil Mid Cap ETF BRAZ
Wisdom Tree Brazilian Real ETF BZF

The Bottom Line

Brazil (the 'B' in the so-called BRIC countries) is a country that has a lot of growth potential that comes with notable risks. Being heavily reliant on natural resources and with a certain degree of political stability risk, investing in Brazilian equities should be done with careful consideration. Potentially, this market can offer outsized returns as Brazil continues to become a fully developed nation and integrate into the world economy .

Adding ADRs or international ETFs to an investment portfolio can help with diversification, increasing potential returns while minimizing overall portfolio risk. The less each foreign market is correlated with the U.S. market, the greater for diversification potential. Any one individual foreign stock or even individual countries pose their own unique risks that must be considered. The political and economic climate of each country varies and can be volatile, especially in emerging markets.