The group of nations known as the BRICs consists of Brazil, Russia, India and China. The term was coined 10 years ago by Goldman Sachs asset manager Jim O'Neill, in an economic report titled "Building Better Global Economic BRICs." The report predicted that if the four BRIC countries continued their rates of growth, they would become a much bigger part of the world economy within a decade. O'Neill's optimistic scenario forecasted their combined GDP share rising from 8% to 14%. Their actual share rose to about 19%.
That rapid growth has caught the eye of investors looking to diversify and grow their portfolios while reallocating risk. This article reviews some of the more popular investment vehicles currently available.
BRIC Exchange-Traded Funds (ETF)
- The SPDR S&P BRIC 40 ETF (BIK) uses a passive management approach to mirror the performance of the Standard & Poor's BRIC 40 Index.
- The Guggenheim BRIC ETF (EEB) invests in companies to closely track The Bank of New York BRIC Select ADR Index.
- The iShares MSCI BRIC Index Fund (BKF) seeks investments that track the performance of the MSCI BRIC Index.
Brazil – The iShares MSCI Brazil Index Fund (EWZ) invests to achieve performance of the overall Brazilian equities market as measured by the MSCI Brazil Index.
Russia – The Market Vectors Russia ETF Trust SBI (RSX) typically invests at least 80% of its funds in Russian depositary receipts in order to closely track the DAXglobal Russia+ Index.
India – The Invesco India Portfolio (PIN) invests to closely track the Indus India Index.
China – The Guggenheim China Small Cap ETF (HAO) seeks to track the performance of the AlphaShares China Small Cap Index.
Other country-specific options include: IQ South Korea Small Cap ETF (SKOR), iShares MSCI Mexico Investable Market Index Fund (EWW), EGShares India Small Cap ETF (SCIN), iShares MSCI South Korea Index Fund (EWY) and Market Vectors Brazil Small Cap ETF (BRF).
Emerging Markets Funds
There are funds that invest in BRIC, as well as other countries that have expanding economies. The Vanguard MSCI Emerging Markets ETF (VWO) and Vanguard Emerging Markets Stock Index Fund (VEIEX) passively invest to match the performance of the MSCI Emerging Markets Index. The top 10 holdings include equities from South Korea, Taiwan, China, Brazil, Russia and Mexico.
- The T. Rowe Price Emerging Market Stock Fund (PRMSX) seeks capital appreciation by investing in emerging markets. The top 10 holdings include equities from China, South Africa, South Korea, Brazil and Mexico.
- The American Funds New World Fund (NEWFX) invests in company stocks and debt securities with large exposure to developing countries.
- The Aberdeen Emerging Markets Fund (ABEMX) invests in emerging market stocks, depositary receipts and convertible securities for long-term capital appreciation.
- The Wasatch Emerging Markets Small Cap Fund (WAEMX) invests at least 80% of net assets in companies with market caps of less than $3 billion for long-term capital appreciation.
Goldman's O'Neill believes that South Korea, Turkey, Mexico and Indonesia are poised to experience growth that's on par with the BRIC countries. This does not include remittances. In fact, he forecasts that the combination of all of these countries will produce economic output as large as the G7 by the end of this decade. That would double their current GDP of about $13 trillion, assuming somewhat softer growth rates. However, if they all grew at the same rate as in the past decade, they would grow by an additional $7 trillion.
O'Neill is expecting a slowdown in China and a likely acceleration in India. In a recent policy shift, the Indian government has allowed majority foreign ownership in local businesses. This is likely to attract large, global retailers looking to capitalize on a huge, untapped demographic.
John Browne of Euro Pacific Capital predicts a potential clash of monetary systems and banks as the BRIC nations are currently attracting 53% of the world's investment capital. The BRICs plan to establish their own bank that could challenge the dominance of the IMF and World Bank in the rapidly developing countries. This would pit the debased currencies of the Western debtor nations like the U.S. against currencies backed by countries with growing industrial economies, high savings rates and immense reserves. Browne believes the BRIC nations pose a serious challenge to the U.S. dollar as the world's reserve currency.
The Bottom Line
While it's convenient to lump countries into categories, the BRIC countries share little in common. From an investing perspective, it's wiser to buy country-specific funds and build your own emerging markets portfolio. China's growth rate appears to be stalling while India seems poised for higher growth over the next decade. If you do buy a BRIC fund or emerging markets fund, check the investment weightings by country to ensure you're getting the exposure you want.
Beyond the BRICs, other countries to consider are Mexico, Turkey, Indonesia, South Korea, Chile and South Africa. Some funds that cover a broad spectrum of such countries are: Guggenheim Frontier Markets ETF (FRN), SPDR S&P Emerging Middle East & Africa ETF (GAF), iShares Inc MSCI Emerging Markets Index Fund (EEM) and Invesco MENA Frontier Countries Portfolio (MNA). As always, do your own research before making investments of any kind.