Fresh off the successful launch of their Lithium Fund (LIT), Global X unveiled the newest addition to its lineup yesterday, the Brazil Financials ETF (BRAF). This fund makes 14 ETFs in total for the New York City based issuer which has a heavy focus on international funds including China sector ETFs and a fund tracking equities in Colombia. The fund is also the third a series of Brazilian ETFs from the company, coming after earlier launches in the consumer sector (BRAQ) and a Mid Cap ETF (BRAZ). These funds offer exposure to the dynamic Brazilian economy which is currently a $2 trillion force which is poised to double by 2018 and eventually surpass Britain and France to become the fifth largest economy in the world.
Due to these trends, Brazil makes for an interesting choice for investors seeking exposure to financials in Latin America and emerging markets in general. Although greatly troubled in the past, the country has become an economic powerhouse under the direction of President Luiz Inácio Lula da Silva who oversaw high growth levels and moderating inflation throughout most of his tenure. However, the real catalyst for Brazil’s rise in finance came in 1995 when the government revolutionized its financial system under the Proper Restructuring Program.
The program implemented a set of measures that allowed the Central Bank to enhance the oversight of financial institutions, whereby weak financial institutions were required to either increase their capital, transfer shareholder control, or be acquired by another bank. As result, the strength of the Brazilian financial system was enhanced and Brazilians have much more confidence in the financial system; from 2001-2008, the number of checking and savings accounts in the country both more than doubled with checking accounts now numbering more than 120 million and savings accounts approaching the 75 million mark.
In addition to growing consumer banking, the country has seen a surge in commercial financial activities as well. In fact, loan portfolios in Brazil are approaching $800 billion and currently exceed the next five largest loan portfolios in Latin America combined, suggesting that the country has a reasonably well-developed and diversified financial sector which is poised to become the hub of Latin American financial activities. This is further underscored by a report from Dealogic which showed that 156 Brazilian M&A deals worth $37.8 billion in Q1 2010 took place; nearly double the $19.1 billion over 81 deals posted in Q1 2009. Estimates indicate that M&A activity continues to grow quickly and totals for 2010 will be high.
Under The Microscope
The new fund tracks the Solactive Brazil Financials Index which 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. While all of the fund is exposed to the financial sector, it does a great job in terms of allocating assets to the various sub-sectors of the financial industry. 44% of assets go towards banking firms, 33% to real estate, 16% financials services, and 7% to insurance which ensures that investors get access to the full spectrum of financial activities in Brazil. For individual holdings, Banco Bradesco SA Preferred (BBD) takes the top spot with 10.5% of the fund’s total assets. This is closely trailed by Itau Unibanco Holding SA (ITUB) (10.3%) and Banco Do Brasil which round out the top three holdings. Roughly three-fourths of the exposure is denominated in reals while the rest is in U.S. dollars. The fund holds 25 securities in total and will charge an expense ratio of 0.77%.
Disclosure: No positions at time of writing.
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