This will be the first article in a new monthly series focusing on undervalued ETFs, which have the potential to outperform in the short-term. The purpose of this series is to highlight an ETF that has underperformed the market, is trading at a discount, has a fundamental driver, and has a favorable technical outlook. The goal will be to outperform the market over the next month whether that is the S&P 500 (SPY) if the ETF I highlight is a stock ETF, or if the selection is a bond ETF, the goal is to outperform the iShares Core Total U.S. Bond Market ETF (AGG). The ETF I will be highlighting this month is the Market Vectors Brazil Small-Cap ETF (BRF).
Fund Description: BRF tracks the Market Vectors Brazil Small-Cap Index, described as
"A rules-based, modified market capitalization-weighted, float adjusted index comprised of publicly traded small-capitalization companies that are domiciled and primarily listed in Brazil or that generate the majority of their revenues in Brazil."
Expense Ratio: BRF has a 0.60% expense ratio, which is the lowest out of all the pure-play Brazil ETFs.
Other Information: BRF currently has $196.7 million of AUM, and pays an annual dividend of 0.94%.
Performance: BRF has fallen 9.54% in the last quarter compared to SPY, which has gained 9.43% in the last quarter. Over the last month, the chart below from Yahoo Finance shows that shares of BRF have significantly underperformed the SPY, however BRF has outperformed the largest ETF that tracks Brazilian stock, the iShares MSCI Brazil Capped ETF (EWZ).
Discount: NAV [Net Asset Value] data from the BRF fund page shows that BRF is currently trading at a 0.27% discount. BRF has traded at a discount just under 74% of the time this quarter since shares have been underperforming.
Fundamental Catalyst: A potential catalyst that could boost shares over the next month is the Brazilian unemployment has fallen to its lowest level in the last 10 years. The chart below from tradingeconomics.com shows that the end of the year has seasonally been the lowest unemployment rate for each year, and that the long-term trend has been to a lower unemployment rate. In addition, the second chart below shows that at the same time unemployment has been falling, wages have been rising, which when combined with falling inflation in Brazil, could lead to increased spending by consumers in the growing middle class of Brazil. This is where BRF should benefit because small-cap companies do all or the majority of their business locally, so an increase in domestic spending should benefit BRF.
The chart below shows that shares of BRF have been in a steady decline since the middle of October, which is shown by its price and by its downward trend line [Red Line]. However, BRF has a level of support [Blue Line] at around $29, and BRF has held this level twice over the last month. The current technical setup has two possible outcomes that I see which could occur over the next month. The first scenario is that shares fall below its support and continue trending downward. The second scenario, which I believe, is the most likely to occur, is that shares will hold support and break above the downward trend line which has acted as resistance, and outperform SPY over the next month.
In closing, I believe the Market Vectors Brazil Small-Cap ETF is a good choice to outperform the SPY in January because it has underperformed SPY, is currently trading at a discount, has a fundamental driver, and has a favorable technical outlook.