Market Vectors Brazil Small Cap - A New ETF for Exposure to Brazil

I really like some of the products out of Van Eck Global's ETF lineup; we've covered quite a few in the past. One beef I've had is while we have a litany of individual Chinese companies to choose from with American ADRs, the choices in India, Brazil (and if you are are a gunslinging investor) Russia are far more sparse. In an increasingly flat world, I do believe demographics will be destiny, as after we covered the 4th most populous country in the world two weeks ago [May 22, 2009: Guest Post - Indonesia; A Must Own Emerging Market] - let's now look at the 5th most populous.

For Brazilian exposure there are approximately 30-35 individual ADRs on American exchanges as best as I can tell - some of the more obvious big cap names are:

• Petrobras (PBR)
• Vale aka RIO aka CVRD (VALE)
• Banco Bradesco (BBD)
• Banco Itau (which looks like its changed its ticker from (ITU) to (ITUB))
• Gerdau (GGB)
• Companhia Siderugica (SID)

and then the pickings get materially smaller from there. We've owned Brazilian homebuilder Gafisa (GFA) on and off for the better part of nearly 2 years [all Gafisa related posts click here] Embraer (ERJ), a builder of aircrafts, is another choice we looked at last year [Jul 8, 2008: Has Embraer Hit Bottom?]. Now the typical state side investor will prefer an easier broad ETF- and the one choice for Brazil has been iShares Brazil (EWZ); while I've owned this ETF in the past I have not been a huge fan of it for diversification reasons as I stated in 2007 [Nov 8, 2007: Petrobras Soaring Today]

So I've talked today about 2 stocks in my iShares Brazil ETF (EWZ) - what exactly does this ETF hold? It's an interesting country ETF because unlike most countries it is DOMINATED by 2 companies - CVRD (RIO) and Petrobras (PBR) You can see the full holdings of iShares Brazil ETF here

Essentially CVRD (RIO) is 24% and Petrobras (PBR) is 22%, so nearly half of the ETF is these 2 names - next come the 2 major non state owned banks, making up the next 11.5%. So nearly 60% of the ETF in 4 names. Something to keep in mind when you buy these country index ETFs... take a peak inside to see what they own.

I just checked today, and 1.5 years later VALE (which used to be be CVRD (RIO)) and PBR are now up to 50% of the ETF; so it has become even more concentrated of an ETF. Now Brazil is a very commodity heavy country and essentially buying the country is making a bet on commodities most of the time so maybe the heavy emphasis on 2 names is a relatively moot point. However, we appear to have an interesting candidate for those who are perhaps looking for a broader exposure to Brazil...Market Vectors Brazil Small-Cap (BRF). The fact sheet can be found here; this is a new introduction that came online May 14th. Per the description

The Brazil Small-Cap ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Brazil Small-Cap Index.

The Index provides exposure to publicly traded small capitalization companies that are domiciled and primarily listed on an exchange in Brazil or that generate at least 50% of their revenues in Brazil. As such, the Fund is subject to the risks of investing in small cap stocks in this country.

It seems each week we get new ETFs and frankly most are useless or die on the vine from "me too" status... so you have to look carefully at volume or you could be stuck in a very illiquid vehicle. I think the future could be promising in that regard in BRF as after trading in the 100K share range for part of the past few weeks, it tripled to nearly 300K yesterday. Since there are so few Brazilian ETFs this one has a chance to be a way for institutional money to play the country without such exposure to just two stocks.

The (net) expense ratio is 0.73% (for at least a year), and the ETF has gathered $11.1M in assets in short order. There are 53 constituents and I won't pull punches in implying I am familiar with these stocks - effectively you are buying this sort of ETF for country exposure. However, we can look at sector exposure and the main components are as follows:

• Consumer Discretionary: 31.7%
• Materials: 15.8%
• Financials: 11.7%
• Utilities: 10.7%
• Industrials: 10.5%

So effectively that is 3/4th of your exposure in those 5 groups; the weighted market cap in the entire ETF is $1.4 billion (range $250M-$3.8B) so the companies are still of a decent size. Let me reinforce what I said above - buying Brazil at this point (as treated by the institutional money which moves these markets) is simply a 2nd derivative play on China and/or commodities. The correlations among these groups are very close - so despite a very different sector exposure than say EWZ. I'd expect this ETF to track oil / "global growth" bias very closely.

The track record thus far is very short, so I am not sure how much we can read into it - but I decided to take a quick look at the return in EWZvBRF during the duration both have been around. Essentially one ETF returned 21% and the other 20%... which is at least an anecdotal support for the idea that "as goes commodities, so go all stocks in Brazil". I know this from my experience in Gafisa... when oil falls people trash Gafisa as if it has oil wells... and vice versa.

Once more, while I am a big believer in these markets in the long run - they have run hot and heavy so jumping in at this point might pay off, but risks of a substantial pullback increase with each parabolic surge higher.

[May 16, 2008: Brazil is Sexy]

Comments

[Sober Realist]

BRF is on my radar, but I'll wait until a drop. Brazil is sezy; I married one.

2009 Jun 02 10:21 AM

[Sober Realist]

sexy

2009 Jun 02 10:22 AM

[RiskReturnOptimizer]

I wish the same ETF manager would come up with a Mexico Small Cap ETF, consisting of comparable consumer oriented companies.

Personally, I would go long the Brazil consumers, hedged with short Mexico consumers. This will offer the best risk-reward as the two economies are diverging: Mexico is too pegged to US growth; Brazil is levered to China growth.

The consumer story is stronger in Brazil as it's GDP (translating to PDI -- personal disposal income) per capital is much lower than Mexico, and the strongest growth in emerging markets happens when the per capita PDI goes from that of Brazil to that of Mexico.

2009 Jun 02 11:48 AM

[Joshua Morgan Brown]

yeah, you want to get exposure to the new middle classes in these countries, the materials and mining exposure is easy to do via large cap adr's and existing etf's

good pickup Mark, I usually let these things trade for a little bit before jumping in

for RiskReturnOptimizer...... at VSS, international small cap...I doubt it has a lot of mexico, but its a starting point i suppose.

great article!

2009 Jun 02 01:50 PM

[Graham and Dodd Investor]

If Petrobras and Vale together make up about half the Bovespa (as I believe it does), this consumer goods-oriented ETF seriously mistracks.

Maybe you WANT to mistrack, if you dislike the "top two" stocks. Maybe you want an exposure to the "other" Brazilian market.

But forewarned is forearmed.

2009 Jun 02 03:54 PM

[John Galt]

One of the things you have to keep in mind with these country ETF's is currency. The Brazilian Real appreciated from about 2.7 to 2.0 dollars currently. That helps big time when those profits are translated back into dollars.

Since ~50% of the fund is tied to Vale + PBR, you need to worry about the Real/Oil and you need to worry about China for CVRD.

Since the real poop show in April, the appreciation of the Real + rising oil prices have really helped Petrobras, but I do believe that oil is overvalued and that the stock could take a major hit on bad... worse oil news or worse news on the general economy.

$

2009 Jun 02 09:46 PM

[dcb]

Once more this is cetin again using another name and spamming. this time he is saying things in a different tune than he would post in his real name. why can't we turn this troll of.


On Jun 02 07:07 PM foobar wrote:

>
> bankers selling our childrens futures..for more bailouts? the disgrace.
> it's horrible. too big to fail needs to fail. we neeed LESS bailouts.
> If you fail U fail.
>
> Total credit market debt as a percentage of GDP has risen from 130%
> of GDP in 1952 to 350% of GDP today. The various bailout and stimulus
> schemes enacted in the last year will drive this percentage above
> 400% in the near future. When a country allows this much debt to
> accumulate versus its GDP, they have done something seriously wrong.
> The country’s politicians, business leaders, and citizens have all
> contributed to this disaster.
>
> good articles: fly2.ws/9SdkpLU

2009 Jun 02 10:24 PM

[gniappe]

These emerging markets etf have run up quite a bit, but I still like Brazil along with China and India for the long-term. I have also started to take a look at Chile, which you can play with ECH [www.gniappe.com/2009/0...].

2009 Jun 03 01:21 AM

[Paul Harper]

Have been watching Brazil for some time & I like the Itau - Unibanco tie up, which has resulted in ITUB. Consolidation in Brazilian banking will continue & this ticker is the cream of the crop. Another banking ADR is Bradesco / BBD which I am also holding as of early February.
For those looking for more diverse ADR financial holdings in Spain, Spains Santander / STD (again long) & HSBC /HBC which are the two largest foreign players.

for a full list of Brazilian ADRs, you can go here (not affiliated) :

www.latinstockinvestin...

2009 Jun 03 09:01 AM

[TraderMark]

Paul thanks for the heads up - I didnt realize ITU had changed their symbol but now I see why... still don't see a reason for them to change the symbol when they could change the name but those Brazilians are a wild and crazy bunch ;)

I would like to re-enter this market on a sizeable pullback. Outside of GFA I am sitting back for now. It's become a crowded trade IMO for now.


On Jun 03 09:01 AM Paul Harper wrote:

> Have been watching Brazil for some time & I like the Itau - Unibanco
> tie up, which has resulted in ITUB. Consolidation in Brazilian banking
> will continue & this ticker is the cream of the crop. Another
> banking ADR is Bradesco / BBD which I am also holding as of early
> February.
> For those looking for more diverse ADR financial holdings in Spain,
> Spains Santander / STD (again long) & HSBC /HBC which are the
> two largest foreign players.
>
> for a full list of Brazilian ADRs, you can go here (not affiliated)
> :
>
> www.latinstockinvestin...

2009 Jun 03 03:31 PM

[TraderMark]

Why do you think ITUB is better than BBD? Just curious

In India I've been with HDB and IBN on and off for years, but HDB considered better quality... doesnt mean better stock performer.

I've never looked so deeply at the Brazilian banks because frankly everything in Brazil trades with oil it seems.


On Jun 03 09:01 AM Paul Harper wrote:

> Have been watching Brazil for some time & I like the Itau - Unibanco
> tie up, which has resulted in ITUB. Consolidation in Brazilian banking
> will continue & this ticker is the cream of the crop. Another
> banking ADR is Bradesco / BBD which I am also holding as of early
> February.
> For those looking for more diverse ADR financial holdings in Spain,
> Spains Santander / STD (again long) & HSBC /HBC which are the
> two largest foreign players.
>
> for a full list of Brazilian ADRs, you can go here (not affiliated)
> :
>
> www.latinstockinvestin...

2009 Jun 03 03:32 PM