BRF VanEck Brazil Small Cap ETF

In a climate of sluggish economic growth, investors have duly turned their attention to emerging markets. These markets, though growing slower than before, have shown more promise than the developed ones.  One such nation that has attracted investor interest is Brazil.  

Brazil’s big and strong agricultural, mining, manufacturing, and service sectors have triggered the economy’s rise to a nearly $2 trillion GDP, thereby setting it apart from other economies in South America and building a strong position in the world market. Besides, its huge commodity market along with a stable outlook in terms of geopolitics, has placed Brazil in a favorable light compared to other major emerging markets.

Recent Brazil History

Brazil to its credit has worked hard over the years to attract foreign investment. The nation has bolstered its macroeconomic strength while reducing its debt burden. In fiscal year 2008, Brazil turned out to be a net external creditor and two rating agencies honored Brazil with investment grade status to its debt (read Top Three BRIC ETFs).

However, after delivering two years of continuous growth, Brazil became the victim of the broader market slump. The global crisis hampered the country’s commodity export and external credit. Yet, after surviving the six months of recession, Brazil delivered positive GDP growth in fiscal 2010 thereby regaining investor confidence.

In a further testament to the importance and resiliency of the Brazilian economy, investors should note that it was the first major emerging market to come out of the recession. Additionally, the country has replaced the UK as the world’s seventh largest economy, in purchasing power parity terms.  

Thanks to this, Brazil has also experienced an increase in investor interest via ETFs. This has become even more the case as issues in China are making many investors look to other nations for their developing market exposure.

As a result, the Brazilian economy has seen the initiation of several ETFs that provide exposure both across capitalization levels as well as among various sectors. In total, there are nine ETFs which provide an exposure to the Brazilian economy. Below we briefly discuss these options for those looking to cycle into the impressive economic power that is Brazil:

MSCI Brazil Index Fund (EWZ)

The MSCI Brazil Index Fund is the oldest and the most popular ETF which gives exposure to the Brazilian economy. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Brazilian market, as measured by the MSCI Brazil Index.

The product appears to be liquid as approximately 14 million shares change hands on a daily basis and provides exposure mostly to the large cap stocks of Brazil. The fund invests its $8,655.3 million of net assets in 81 stocks (read Seven Biggest International Equity ETFs).

However, the fund invests 54.3% of its asset in the top ten holdings which suggest that the fund is highly concentrated in the large cap equities. Additionally, Petrobras occupy the top position in the fund holding, so the Brazil ETF relies heavily on this oil giant to set the pace of the product. This exposure, along with a heavy mining component, could ignore the effect of domestic trends in the economy and may not offer investors the pure play on Brazilian economy.

Among the sectors that the fund is most concentrated in, Financials and Materials holds the lion’s share making up 44.2% of the total investment. For the investment made in the ETF, the investor pays an expense ratio of 59 basis points.

Despite the heavy weighting towards the large cap equities, the fund delivered a negative return of 13.63% over a period of one year impacted by the broader market slump.

Market Vectors Brazil Small-Cap ETF (BRF)

In order to have a pure play on the Brazilian economy beyond transnational firms, the Market Vectors Brazil Small-Cap ETF was introduced. This fund provides exposure to the small cap equities of the Brazilian market and tracks the Market Vectors Brazil Small Cap Index. The fund holds a total of 79 small cap stocks and has a total asset base of $635 million of which 30.1% is invested in the top 10 holdings.

So unlike EWZ, the fund appears to be diversified with assets not just concentrated in the top 10 holdings but instead spread among other companies beyond the list of top 10. Among the different sectors, Consumer Discretionary and Industrials occupy the top two positions with 48.7% of investment made in these two categories (read Brazil Small-Cap ETF Showdown).

Market Vectors Brazil Small-Cap ETF charges a fee of 62 basis points for the investment. Small cap companies are more volatile than their large cap counterparts and may prove to be weaker than large cap companies at times of global crisis. BRF also became the victim of the global calamity and delivered a negative one-year return of 9.83%.

Brazil Infrastructure Index ETF (BRXX)

The Brazil Infrastructure ETF seeks investment results that generally correspond to the performance of the Indxx Brazil Infrastructure Index. This benchmark is a free-float market capitalization weighted stock market index comprising 30 leading companies that the firm determines to be representative of Brazil's Infrastructure industries, as defined by the Industry Classification Benchmark System.

BRXX holds a total of 30 stocks and BRXX has a total asset base of $14.71 billion of which 51.2% 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 (also see Go Local With Emerging Market Bond ETFs).

Among sectors, a maximum of 24.1% is invested in Electricity, while the fund is light on Industrial Engineering with just 4.3% of investment made in the sector. The fund has delivered a negative return of 0.04% over a period of one year and charges a fee of 85 basis points to investors.

MSCI Brazil Small Cap Index ETF (EWZS)

Another fund tapping the small cap companies of the Brazilian market was introduced in September 2010. The MSCI Brazil Small Cap Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Brazil Small Cap Index (see more in the Zacks ETF Center).

The fund holds a total of 81 stocks while close to one-third of the total is invested in the top ten holdings. Among sectors, the fund has 74.6% of assets invested in Consumer Discretionary, Industrials and Finance. The fund charges an expense ratio of 59 basis points, lower than other small cap ETFs in similar markets. Equally important, EWZS delivered a one-year return of negative 2.72%, better than the large cap counterparts.

Brazil Consumer ETF (BRAQ)

Global X launched Global X Brazil Consumer ETF which seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Brazil Consumer Index, provides a window to the Brazilian consumer market.

The fund, with a total asset base of $3,293.5 million, holds a total of 32 stocks in its basket. BRAQ invests 49.12% of its assets in the top ten suggesting a modest concentration in the biggest firms. Among sectors, Food & Beverage occupies the top position while the fund is light on Media. The product charges a total of 77 basis points in fees and has delivered a negative return of 0.17% over a period of one year.

Brazil Mid Cap ETF (BRAZ)

As the name signifies, the Brazil Mid Cap ETF has been designed to tap the mid cap market of Brazil. The fund seeks to track the Solactive Brazil Mid Cap Index. The index is comprised of mid-market capitalization securities of companies that are domiciled or have their main business operations in Brazil.

The fund, through an asset base of $2,432.7 million, taps 43 mid cap stocks of Brazil. However, BRAZ appears to be highly concentrated in the top 10 holdings with 53.89% of the assets invested in those securities (see Mid Cap ETF Investing 101).

Among sectors, the fund has 28.1% invested in Utilities thereby holding the top position in terms of sector exposure. The investors pay an expense ratio of 69 basis points for the investment made in the fund. The ETF delivered a return of negative 2.91% over a period of one year, better than its large cap counterparts.

First Trust Brazil AlphaDEX Fund (FBZ)

Launched in April 2011, First Trust Brazil AlphaDEX Fund (FBZ) is a passively managed ETF designed to track the performance of the Defined Brazil Index, a benchmark dominated by the stocks selected on the basis of the AlphaDEX screening methodology. It appears as though this strategy has paid off in the short term as FBZ has been generating positive alpha thereby beating the benchmark index.

The AlphaDEX methodology for selecting stocks uses both growth and value factors for determination of the stocks to be included in the fund. In this way investors get a blend of the top rated growth and value stocks in one fund. 50 stocks from Brazil comprise the FBZ holding list with a total asset base of $7.9 million.

The fund invests 35.4% of its asset base in top 10 holdings, which signifies that the fund is spread out among other companies as well. Among sectors, Consumer Staples and Utilities are the areas where the fund has maximum exposure while weightings to Information Technology and Industrials are light. The fund since its inception has delivered a negative return of 7.35% and charges a fee of 80 basis points per year.

db-X MSCI Brazil Currency-Hedged Equity ETF (DBBR)

The MSCI Brazil Currency-Hedged Equity Fund seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Brazil US Dollar Hedged Index (the "Index"). The Index is designed to provide exposure to Brazilian equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Brazilian real.

The fund seeks to invest its $4.5 million asset base in 82 holdings and is heavily invested in the top 10 with 57.15% of the asset invested in those firms, thereby signifying a high concentration risk. In addition to the individual security concentration, DBBR is also heavily invested in a few sectors as well.

The Brazil ETF invests 44% of its assets in two sectors: Financial (24%) and Basic Materials (20%). Since its inception, the fund has delivered a negative return of 6.4% over a period of one year and charges an expense ratio of 60 basis points from investors.

Brazil Financials ETF (BRAF)

The Global X Brazil Financials ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Brazil Financials Index. The Solactive Brazil Financials Index is designed to reflect the performance of the financial sector in Brazil.

It is comprised of securities of companies which have their main business operations in the financial sector and are domiciled or have their main business operations in Brazil. BRAF invest its $408.1 million asset base in 25 holdings (see Three Financial ETFs Outperforming XLF).

The fund appears to be heavily concentrated in the top 10 funds with 69.1% of the investment allocated here. BRAF invests 46.6% of assets in Banks and 28.3% in Real Estate. The fund has delivered a negative return of 7.16% over a period of one year. The fund has charged an expense ratio of 77 basis points per year.

UltraShort MSCI Brazil ETF (BZQ)

BZQ seeks to track the investment results, before fees and expenses that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Brazil Index.  The fund has a volume of 21,100 and charges an expense ratio of 0.95%, the most expensive in the category. The fund has delivered a return of 14.27% over a period of one year.

Ultra MSCI Brazil Fund (UBR)

The Ultra MSCI Brazil seeks daily investment results, before fees and expenses that correspond to twice (200%) the daily performance of the MSCI Brazil Index. With a total volume of 10,400 and AUM of $12.3 million, the fund delivered a one-year return of negative 44.04%. UBR charges an expense ratio of 95 basis points.

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