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What is a 'Brazil ETF'

A Brazil ETF is an exchange-traded fund that invests in Brazilian stocks, either through local stock exchanges or with American and global depositary receipts on European and U.S. stock exchanges. Brazil ETFs are passively managed and are based on a country index created by fund managers, or a widely followed third-party index. Investing in emerging markets can add an international flavor to a portfolio, but stock picking in these countries can be a difficult process. Instead of investing in individual companies, an investment in the broader Brazilian market may be a better route for investors. 

BREAKING DOWN 'Brazil ETF'

A Brazil ETF is one of the better ways to invest in Brazil, which has been attracting greater interest from investors as the economy continues to develop. As the country's financial markets open up to increased foreign investment, ETF choices should become more diverse. Investors may find that a Brazil ETF is more overweight some sectors than others compared to a diversified U.S. For example, the Brazilian economy historically has been strong in areas like natural resource production and finance, but weaker in other areas such as healthcare and technology. 

Exposure to the Brazilian market as a whole is typically best done by way of a broad market index. Low-cost ETFs make this endeavor easier than ever. In Brazil, ETFs track two indices. Another option for investors would be to invest in the broader Latin American markets or other emerging countries through dedicated indices. Brazil has a significant weighting in the MSCI Emerging Markets Latin America Index, less so in BRIC indices, which include Brazil along with Russia, India and China.

Brazil ETFs and Risk

Brazil may offer investors the potential for above-average returns, especially when valuations looked stretched, or high, in more developed economies. In 2017, Brazil along with its emerging market peers combined to outperform their developed market counterparts after years of underperformance. In addition, Brazil’s domestically oriented small-cap stocks showed momentum and gains, perhaps indicative of increased structural strength throughout the economy. 

However, investments in an emerging market country like Brazil come with risks that investors should note. In particular, Brazil has a long history of geopolitical instability and scandal. Because ETFs invest in a variety of stocks, investors have more protection if they engage a strategy rooted in stock picking and individual stock selection. Investors should monitor market developments regularly and make sure that their investments remain in line with their risk tolerance.

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