Tuesday, June 2, 2009

Market Vectors Brazil Small-Cap (BRF): A New ETF for Exposure to Brazil

I really like some of the products out of Van Eck Global's ETF lineup; we've covered quite a few in the past. One beef I've had is while we have a litany of individual Chinese companies to choose from with American ADRs, the choices in India, Brazil (and if you are are a gunslinging investor) Russia are far more sparse. In an increasingly flat world, I do believe demographics will be destiny as after we covered the 4th most populous country in the world two weeks ago [May 22, 2009: Guest Post - Indonesia; A Must Own Emerging Market] - let's now look at the 5th most populous.

For Brazilian exposure there are approximately 30-35 individual ADRs on American exchanges as best as I can tell - some of the more obvious big cap names are:
  • Petrobras (PBR)
  • Vale aka RIO aka CVRD (VALE)
  • Banco Bradesco (BBD)
  • Banco Itau (which looks like its changed its ticker from ITU to ITUB)
  • Gerdau (GGB)
  • Companhia Siderugica (SID)
and then the pickings get materially smaller from there. We've owned Brazilian homebuilder Gafisa (GFA) on and off for the better part of nearly 2 years [all Gafisa related posts click here] Embraer (ERJ), a builder of aircrafts, is another choicse we looked at last year [Jul 8, 2008: Has Embraer Hit Bottom?]

Now the typical state side investor will prefer an easier broad ETF - and the one choice for Brazil has been iShares Brazil (EWZ); while I've owned this ETF in the past I have not been a huge fan of it for diversification reasons as I stated in 2007 [Nov 8, 2007: Petrobras Soaring Today]
So I've talked today about 2 stocks in my iShares Brazil ETF (EWZ) - what exactly does this ETF hold? It's an interesting country ETF because unlike most countries it is DOMINATED by 2 companies - CVRD (RIO) and Petrobras (PBR) You can see the full holdings of iShares Brazil ETF here

CVRD (RIO) is 24% and Petrobras (PBR) is 22%, so nearly half of the ETF is these 2 names - next come the 2 major non state owned banks, making up the next 11.5%. So nearly 60% of the ETF in 4 names. Something to keep in mind when you buy these country index ETFs... take a peak inside to see what they own.

I just checked today, and 1.5 years later VALE (which used to be be CVRD (RIO)) and PBR are now up to 50% of the ETF; so it has become even more concentrated of an ETF. Now Brazil is a very commodity heavy country and essentially buying the country is making a bet on commodities most of the time so maybe the heavy emphasis on 2 names is a relatively moot point. However, we appear to have an interesting candidate for those who are perhaps looking for a broader exposure to Brazil... Market Vectors Brazil Small-Cap (BRF). The fact sheet can be found here; this is a new introduction that came online May 14th. Per the description

The Brazil Small-Cap ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Brazil Small-Cap Index.

The Index provides exposure to publicly traded small capitalization companies that are domiciled and primarily listed on an exchange in Brazil or that generate at least 50% of their revenues in Brazil. As such, the Fund is subject to the risks of investing in small cap stocks in this country.

It seems each week we get new ETFs and frankly most are useless or die on the vine from "me too" status... so you have to look carefully at volume or you could be stuck in a very illiquid vehicle. I think the future could be promising in that regard in BRF as after trading in the 100K share range for part of the past few weeks, it tripled to nearly 300K yesterday. Since there are so few Brazilian ETFs this one has a chance to be a way for institutional money to play the country without such exposure to just two stocks.

The (net) expense ratio is 0.73% (for at least a year), and the ETF has gathered $11.1M in assets in short order. There are 53 constituents and I won't pull punches in implying I am familiar with these stocks - effectively you are buying this sort of ETF for country exposure. However, we can look at sector exposure and the main components are as follows:
  1. Consumer Discretionary: 31.7%
  2. Materials: 15.8%
  3. Financials: 11.7%
  4. Utilities: 10.7%
  5. Industrials: 10.5%
So effectively that is 3/4th of your exposure in those 5 groups; the weighted market cap in the entire ETF is $1.4 billion (range $250M-$3.8B) so the companies are still of a decent size. Let me reinforce what I said above - buying Brazil at this point (as treated by the institutional money which moves these markets) is simply a 2nd derivative play on China and/or commodities. The correlations among these groups are very close - so despite a very different sector exposure than say EWZ I'd expect this ETF to track oil / "global growth" bias very closely.

The track record thus far is very short, so I am not sure how much we can read into it - but I decided to take a quick look at the return in EWZ v BRF during the duration both have been around. Essentially one ETF returned 21% and the other 20%... which is at least an anecdotal support for the idea that "as goes commodities, so go all stocks in Brazil". I know this from my experience in Gafisa... when oil falls people trash Gafisa as if it has oil wells... and vice versa.

Once more, while I am a big believer in these markets in the long run - they have run hot and heavy so jumping in at this point might pay off, but risks of a substantial pullback increase with each parabolic surge higher.

[May 16, 2008: Brazil is Sexy]

Long Gafisa in fund; no personal position

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