BRF VanEck Brazil Small Cap ETF

After posting strong growth in the previous few years, 2012 turned out to be a turning point for Brazil, as the nation experienced a huge setback in terms of growth. If that wasn’t enough, the Brazilian real depreciated by more than 10% against the dollar in 2012, further adding to the country’s woes (Time to Worry about Brazil ETFs?).

However, in this gloomy environment, the positive aspect of the economy was low unemployment levels when compared with other developed countries thanks to the increase in government expenditure and policies to stimulate consumption.

This year the economy may be poised for somewhat better growth than 2012 as the government continues to take necessary measures to stimulate the economy and make it more competitive.

With this aim, the central bank of the country systematically reduced the interest rates. In order to increase liquidity, reduce consumers’ debt burden and encourage investments, interest rates were lowered to the level of 7.25% (Are Investors Abandoning Brazil ETFs?)

The effort to reboot the economy saw the government undertaking a number of stimulus measures. Infrastructure spending is also on an uptrend as the country prepares to host the 2014 World Cup and the 2016 Olympic Games.

Additionally, manufacturing activity in Brazil, which got arrested a few years back due to a lack of demand and rising inventory levels, is once again set to rebound in 2013. A reduced tax burden on companies, lower pay roll tax and more investment on infrastructure by the government are expected to bring back the pace in manufacturing activity (Brazil ETFs: More Trouble On the Horizon?).

Furthermore, the devalued currency should reinvigorate export activity leading to improvement in international trade and growth in export of manufactured goods. And as employment remains at a good level and the interest rate is declining, domestic spending should go up resulting in consumers coming back to the market.  

Although the measures do not suggest a bull run in the economy, at least the economy appears to rebound in 2013. Improved infrastructure and elimination of other trade barriers could accelerate Brazil's economic growth rate and raise its exports.

For investors willing to play this optimism in the economy in basket form, we have briefly highlighted a few of the ETFs tracking the economy (The Comprehensive Guide to Brazil ETFs).

MSCI Brazil Index Fund (EWZ)

MSCI Brazil Index Fund is the oldest and the most popular ETF which provides exposure to the Brazilian economy. The product appears to be liquid as more than 12 million shares change hands on a daily basis and provides exposure mostly to the large cap stocks of Brazil.

The fund invests its $9.2 billion of net assets in 83 stocks with highly concentrated exposure in large cap equities. As much as 53.4% of its assets go towards the top ten holdings. Vale, Itau Unibanco Holding and Petrobras (PBR) occupy the top line of the fund (Forget Petrobras with These Brazil ETFs).

Among the sectors that the fund is most concentrated in, Financials and Materials hold the lion’s share making up 45.9% of the total investment. For the investment made in the ETF, the investor pays an expense ratio of 60 basis points.

The fund delivered a negative return of 21% over a period of one year impacted by the slowdown in the economy.

Market Vectors Brazil Small-Cap ETF (BRF)

In order to have a pure play in the Brazilian economy, Market Vectors Brazil Small-Cap ETF was introduced which provides exposure to the small cap equities of the Brazilian market.

The fund holds a total of 74 small cap stocks in which it invests an asset base of $586.4 million of which 31.5% is invested in the top 10 holdings. So unlike EWZ, the fund appears to be diversified with assets not just concentrated in the top holdings but also spread among other companies beyond the top holdings (Do Country ETFs Really Provide Diversification?).

Among the different sectors, consumer discretionary and industrials occupy the top two positions with 56.8% of investment made in these two categories. The fund charges a premium of 59 basis points for the investment.

Despite a slowdown in the economy, it seems that the small caps of the region performed a bit better, losing just 8% in the past year and adding almost 10% in the past three month period.  

Brazil Infrastructure Index ETF (BRXX)

As Brazil looks to improve its infrastructure, investors should look to invest in The Brazil Infrastructure Index ETF (BRXX) for a timely exposure.

BRXX holds a total of 30 stocks. The fund has a total asset base of $81.2 million of which 51.8% is invested in the top 10 holdings. A high concentration level in the top 10 holdings suggests that the fund is not spread among other companies.

Among sectors, the fund has made double-digit allocation in electricity, gas, water and multiutilities and Real Estate Investment & Services. The fund has been beaten down as well over the past year, but has added about 3% in the trailing three month period, along with paying a sizable yield.

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MKT VEC-BRZL SC (BRF): ETF Research Reports
 
EMERG-GS BRAZIL (BRXX): ETF Research Reports
 
ISHARS-BRAZIL (EWZ): ETF Research Reports
 
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