Brazil's New Oil Wealth: Three ETFs to Watch

For many Americans, the idea of “reducing our dependence on foreign oil” seems like an enormous undertaking. Decades after the push for developing green energy sources began, little progress has been made. The spectacular failures (remember the ethanol experiment?) have far outnumbered the mild successes. Solar power technology has improved by leaps and bounds, but it still hasn’t been proven as financially viable, and the U.S. trails badly behind China and Japan in the race to become the world’s dominant player. Although there is seemingly a Prius on every street corner, rising gas prices hurt just as much as ever.

Maybe we could learn a thing or two from Brazil. Following severe energy shortages more than 30 years ago, Brazil has successfully carried out a green energy revolution. The country that once imported 85% of its oil is now a net exporter. The Latin American nation (and potential Olympic host) relies on hydroelectric power for more than 80% of its energy needs and utilizes ethanol (or a gas/ethanol combination) to power 90% of the cars on its roads.

So it is somewhat ironic that in 2007 state-run Petroleo Brasileiro SA reported the largest Western Hemisphere oil discovery in 30 years in offshore territorial waters. Nearly two years after the discovery, Brazil is reforming its oil laws under a plan intended to divert a significant portion of the country’s oil wealth towards improving education systems and combating poverty. President Luiz Inacio Lula da Silva is currently pushing a plan that would speed up development of the oil deposits to jumpstart the efforts to improve living conditions in South America’s largest country.

Similar to the procedures implemented in Iraq earlier this year, the Brazilian government plans to auction off exploration and production blocks, with the winners determined primarily by the amount of oil they are willing to grant the government. Winning bidders are also expected to make an upfront payment that will be directed towards a social investment fund.

This is a critical point in Brazil’s development. Since the nation depends very little on oil to power its infrastructure, proceeds from the Tupi discovery (and other smaller discoveries made since) are essentially a windfall for a country that has experienced rapid economic growth, but is still plagued by problems common in emerging markets, such as sub-par social services, political corruption, and widespread poverty in certain areas.

Although Silva has called the discoveries “a gift from God,” the discovery does not guarantee that Brazil’s next step will be an easy one. Countless other nations have fallen victim to the “resource curse” in the past, done in by political infighting, reckless policies, and deep-rooted corruption.

Three ETF Plays On Brazil’s Oil Wealth

As a member of the BRIC bloc, Brazil is included in a number of emerging markets ETFs (use our Free ETF Screener to see the complete list). In addition to these funds, there are a few ETFs that offer unique exposure to Brazil and certain sectors of its economy:

• Market Vectors Brazil Small-Cap ETF (BRF): BRF is a relatively new ETF, having been launched in May of this year (sign up for our Free ETF Newsletter to stay up to date on all new ETF launches). This ETF focuses on smaller companies listed in Brazil, and maintains a significant allocation to consumer discretionary equities, a sector that could benefit from a plan to distribute the country’s oil wealth more evenly.

• iShares MSCI Brazil Index Fund (EWZ): EWZ offers diversified exposure to the Brazilian equity markets, and is one of the largest and most liquid international ETFs available. EWZ has been one of the best performing ETFs this year, gaining more than 60% so far in 2009. For investors looking for broad exposure to Brazil equities, EWZ is the best pure play option available.

• PowerShares Global Emerging Markets Infrastructure (PXR): This ETF invests in equities of several emerging economies, but maintains a significant allocation to Brazil (9% of holdings). PXR is one of only a handful of ETFs to offer exposure to specific industries outside the U.S., focusing exclusively on companies engaged in infrastructure construction. Although education seems to be the first priority for Brazil’s government, improvements to the infrastructure of the country figure to be high on the priority list as well. If the government finds itself with cash to spend, Brazilian equities could give this ETF a boost.

Disclosure: No positions at time of writing.

Comments

[Gravity404:]

I agree with your buy recommendations on these ETF, however I completely disagree with your comparision of Brazil and Green. Hydro - yes (kind of) Ethanol - no way

Basically 90 percent of Brazils population is in two cities or at least along the coast, nearby. The US center of population is somewhere in Kansas. How do you transport Ethanol to NY, LA, Houston and Chicago and everywhere in between? But that argument is for another article.

I think the take aways from this is the fact that Brazil is rapidly climbing the developing markets, Faster than any other country incudlig China. Therefore the real story is in the Natural Resource exports bringing in a tremendous amount of money from outside, dramatically increasing wealth for the general population.

Thats the combo EWZ and BRF play. Short and long term investments.

Sep 04 09:41 AM

[Mad Hedge F...:]

mgh. Crude has been trading like a 3X short dollar ETF. If you look at pure supply/demand considerations, oil should be trading in the $40-$50 range, not the $65-$75 range that we have seen. That means that a $25 speculative premium can be laid purely at the door of the big hedge funds. The big oil producing countries, seeing Obama’s policies leading to a weak dollar for as far as the eye can see, are also ditching their bucks as fast as they get their hands on them. That is why the Gulf sheikdoms were one of the biggest buyers of crude near last year’s $148 peak. This leaves industry insiders clueless about the price direction of their products, not an easy way to run a business. They understand rig counts, tanker deliveries, and depletion rates, not commitment of traders reports, Bollinger bands, and Fibonaccis. No doubt it was their carping that brought regulators to pressure Deutsche Bank to shut down its double long oil ETN (DXO). Of course, this all means the consumer is getting shafted, paying $3.39/gallon at the pump, instead of $2. This premium is causing a drag on the economic recovery as well. Europeans and Japanese who are paying up to $10/gallon are wondering what we are bitching about. Bring on a “W” recession and poof!, that premium disappears, as it did last year.

Sep 04 10:05 AM

[oilsands:]

Good article.
I'm not even sure what Gravity404 is trying to say about green. Hydro is green. They are successful with the ethanol; it enables them to export rather than import oil. Yes there are better solutions, but they accomplished a major coup by doing what they did. Their solution is not ours in detail, but we have numerous ways to use existing technology to reduce our oil imports; to stop eroding our dollar.
If we quit giving tax subsidies to oil companies, the true cost of gasoline would speed up the transition toward alternatives. Converting engines to natural gas, starting with truck fleets is a sensible solution. UPS began doing it years ago because it made financial sense.
And no we can not drill our way out of this problem. There is still worldwide competition for both equipment and trained manpower in the oil industry. Soon the price of oil will rise as the very high costs of recovery from the remaining locations are factored in.
Our weak dollar is the result of total national stupidity on so many fronts. It didn't begin last January. During the Bush administration the Canadian dollar rose from .65 US to 1.10 US.
The ridiculous belief that we can survive with a consumer economy is a large part of why we are in trouble.

Sep 04 11:04 AM

[Alan von Al...:]

Brazil pre-salt windfall ?? blogs.ft.com/energy-so.../

Sep 04 12:52 PM

[Alan Young:]

Brazil is to be admired for managing (so far) to distribute its oil-export profits in a way that benefits the society as a whole; not just a few kleptocrats (Nigeria) or the have-nots (Venezuela).

I would quibble with the characterization of EWZ as "diversified" and "broad exposure." EWZ's concentration in a few resource companies is extreme; it rises and falls with commodity prices. BRF is far broader and more diversified, or hold both for the most balanced exposure.

Sep 04 03:32 PM

[kulgogi:]

Additional reasons to like Brazil:
- Limited exposure to the financial crisis. Brazilian banks [so I read] avoided exposure to mortgage-backed securities and the various 'toxic' assets that felled Wall Street titans and many foreign companies and governments. The Brazilian financial system thus (as best I can tell from my research) seems to be basically sound and stable; a good basis for the nation's growth.
- Inflation fear. Brazilians who are alive today know personally what high inflation is like, as they've had their run-ins with double-digit inflation. So I think there's every reason to expect that the government (and society more generally) will keep their eye on the ball to protect the real and avoid debauching their currency. [I have much less faith about the U.S. dollar.]
- Calm political situation. Luis da Silva has caused some rumblings and is no apologist for the United States, to be sure. But Brazil's socio-political system seems much stabler to me in the long-ish term than Russia's [certainly] or even China's or India's.
Those are a few reasons why, of the 'BRICs', I'm long EWZ and BRF.

Sep 04 05:35 PM

[The-Stock-M...:]

Will Brazil be the next Middle East? I mean in terms of oil wealth? Do they have that much oil reserves. Even if so, aren't other nations, US of A included, trying to wean off oil? Hence can oil wealth of Brazil be sustainable? I guess I'm asking too many questions!

Sep 06 02:37 AM

[Alan von Al...:]

On Sep 06 02:37 AM The-Stock-Market-Crash... wrote:
> Will Brazil be the next Middle East? I mean in terms of oil wealth?
> Do they have that much oil reserves.

Absolutely not. Campos production decline suggests that Brazil has 7-10 years recoverable reserves @ 2 million boed, after which they will be net importers again. That's why Santos pre-salt ultradeep play is politically and economically important.

Reserves estimate of pre-salt Tupi, Iara, Sugarloaf, etc run from 500 million to 100 billion barrels. It is debatable whether any of it can be produced without injectors, fracturing, subsurface processing. Brazilian officials insist there's no risk.

Ask Exxon and Anadarko how much risk there is.

Sep 06 11:43 AM

[koot:]

Brazil has more natural resources than most realize, muito mais. The totality of Brazil natural resources encompasses everything a modern civilization needs and requires.

The US elite are fools in both their perception and understanding of Brazil

Sep 07 09:01 PM

[Gravity404:]

Oilsands - I was pointing out that just because ethanol works in Brazil its a bad idea in the US. Also, to keep your (Big US Oil COs bad) mind in check, XOM spent $14 Billion in research/EP last year alone. The only answer is - it is a balanced combination of multiple energy producing options; inculding oil.

Alan Young - You hit the nail on the head. EWZ is 60 percent VALE and PBR. After VALE acquires a large potash co, they will basically mine everything that comes out of the ground, but oil. They have engaged on several producing initiatives with PBR. So, that's why a balanced option too. EWZ and BRF.

Kulgogi - Excellent points. You can't find this attributes investing in Russai or China or in fact India. So much for BRIC.

The Stock...No way. The vast majority of Brazil's reservers are deep water. Much hard than drilling in sand.

Koot - You're just an idiot. -- whereas the non US elite fully understand Brazil??? What the hell are you trying to say, man. Nevermind, I don't care.

Sep 08 08:51 AM

[Mad Hedge F...:]

zyu Hoping to beat the rush, I ordered my Rosetta Stone Portuguese language program last week, fully expecting Rio de Janeiro to win the 2016 Olympics bid. Pick pockets of the favellas of Latin America’s largest city were ebullient. A cheer even went up on the floor of Chicago’s CME, now that the denizens of the Windy City are dodging a monster tax bill. Of course, Obama was in a no win situation, with mud on his face for his failed pitch, and blamed for defeat if he didn’t go. There was never any doubt that the home of the string bikini and the banana thong was going to win. In order to justify the gargantuan cost of the modern games, the International Olympic Committee long ago turned this into an emerging market development program. The great news for investors is that corresponding emerging stock markets have a history of tenfold returns going into the games. Look at South Korea and China. Only the 2004 Athens games were a bust, the home of the Olympics building a games that were far more than it could afford. I have long been a fan of the country that is doing everything right, with a perfect demographic pyramid and a liberal pro business government fueled by resource and energy exports. I managed to catch a 270% leap for my subscribers in the ETF (EWZ) this year. I wouldn’t’ rush out tomorrow and buy on the news, as an impending global stock market selloff is likely to pull it down with everything else. But it definitely should be at the top of your “buy on dips” list.

Oct 04 05:32 AM