It's all about the risk.
The Bovespa index, consisting of the major companies in Brazil, has two additional components of risk than the GSCI alone. First, people are inclined to invest in Brazilian companies, like VALE, and the fast-expanding Banco Bradesco. There are three components of risk in this that people are underestimating.
- Firstly, if you invest in Brazilian companies, you're putting your faith in the Brazilian government.
- Second, if you don't live in Brazil, then you're placing a bet on the exchange rate.
- Third, the P/E ratio varies from year to year, according to investment alternatives. This increases volatility, which is an inherent measure of risk.
If you're comfortable with these additional risks, then all this is fine. I would say that people aren't being adequately compensated for these risks, however. Think about it. The government is leftist, and in a precarious geographic location. The countries around it are young, and tend to have coup d'etats every so often. The exchange rate is extremely volatile, and is based on the currency purchases coming from the central bank. If those purchases change in their behavior, more volatility results, increasing the inherent risk. The equities markets of Brazil are just as turbulent as the rest of the world. Since they are so dependent upon commodities, you could say that they are a leveraged commodity play.
Take a look at the chart to the left. This is a chart of the Brazil ETF (NYSEARCA:EWZ) vs. the GSCI commodities ETF, GSG (green line). You can see how much more volatility goes into the Brazilian ETF. For that reason, if you want to invest in just the people's success in Brazil, you should short GSG to remove the commodity portion of the investment risk you're taking. Conversely, if you want to just invest in the increasing scarcity of commodities, then you should just purchase GSG, and leverage yourself by 2x or more to get the increased returns. You can do this by borrowing to invest or via options.