BRIC ETFs Run Into Speed Bumps

 |  Includes: BIK, BKF, EEB, FNI
by: Tom Lydon

After the Fed eased "tapering" fears, emerging market equity exchange traded funds saw renewed risk-on trades. However, investors shouldn't rush into the developing economies too fast.

Once a hot investment theme, BRIC - Brazil, Russia, India and China - ETFs are losing their appeal as investors' love affair with the developing markets runs cold.

"Every decade, there's a theme that captures investors' imagination - the 1970s was about gold, 1980s was all about Japan and 1990s was about technology companies," Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, said in a Bloomberg article. "Last decade it was about the BRICs. That theme has basically run its course."

So far this year, investors have pulled $13.9 billion out of BRIC equity mutual funds, or 27% of total inflows since 2005.

Meanwhile, the Guggenheim BRIC ETF (NYSEARCA:EEB) and iShares MSCI BRIC ETF (NYSEARCA:BKF) both fell 16.4% year-to-date, and the SPDR S&P BRIC 40 ETF (NYSEARCA:BIK) dropped 14.8%. After the Fed announcement late Wednesday, the BRICs ETFs gained 3% to 4% Thursday.

The MSCI BRIC Index declined 12% over the past quarter while BRIC currencies depreciated 4.1% against the U.S. dollar and government bonds dipped an average 0.6%.

A number of factors have contributed to the decline in BRIC markets. For instance, rising inflation, weak economic growth and violent protests weighed on Brazil. Russia's economy slowed over five straight quarters on lower oil prices. India's currency depreciated to an all-time low due to a widening current-account deficit. China is experiencing its lowest economic expansion since 1990.

"The problem is that it's a structural slowdown rather than a cyclical slowdown," Liza Ermolenko, an emerging-markets economist at Capital Economics, said in the article. "It's more of a new phase rather than this being a temporary phenomenon."

Moreover, speculation on Fed "tapering" has instigated capital outflows from riskier emerging markets.

"Many of these countries got very complacent after a very good decade and they were all riding the wave of the global liquidity," Sharma added. "A lot of money flew to the emerging market based on the assumption that the U.S. is in a terminal decline and you have to go to these large emerging markets. Those expectations are being unwound."

Combined, BRIC GDP was $14.5 trillion last year, compared to $2.8 trillion in 2002 - to put this in perspective, the U.S. economy is $15.7 trillion, according to the International Monetary Fund. BRIC countries made up 62% of global growth in 2012, up 11% over the past decade.

"After years of strong growth, the BRICs are beginning to run into speed bumps," IMF Chief Economist Olivier Blanchard said in the article.

Guggenheim BRIC ETF

Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.