Brazil Sector ETFs Start to Hit Market

NEW YORK (TheStreet) -- Selling specialized exchange traded funds is a path to success for smaller providers.

GlobalX seems to be pursuing this strategy with its commodity ETFs, including the new GlobalX Lithium ETF(LIT) and its sector funds for China and Brazil. The most recent ETF is the GlobalX Brazil Financials ETF(BRAF). The company already has a consumer-stock ETF for Brazil, with materials, industrials and utilities still to come.

The new financial sector fund has a tiered weighting system, so banks including Banco Bradesco(BBD), Itau Unibanco(ITUB) and Banco do Brasil(BDORY) each take up 10%. The next tier comprises mostly real estate companies, each at 5%.

GlobalX Brazil Financials ETF has 25 holdings. A total of 44% of the fund is allocated to banks, 33% to real estate, 16% to financial services and 7% to insurance.

Wealth is being created in Brazil by global demand for natural resources. This boom is creating a better financial lifestyle for workers in the resources industry, giving them more discretionary income to spend, which, in turn, benefits workers in other industries. This newfound wealth no doubt contributed to Brazil having been awarded the 2014 World Cup and 2016 Olympics.

Banks are playing a role as savings and checking accounts proliferate. The number of banks in Brazil almost doubled from 2001 to 2008. In addition, there is foreign-investment demand for Brazilian banks, as is evident by the creation of this ETF and the sorry state of banks in the U.S. and Europe. Emerging-market banks, including those in Brazil, have fewer moving parts and didn't take as many risks. Banco Bradesco and Itau Unibanco are up 30% in the past three years versus a decline of more than 50% for the Financial Select Sector SPDR(XLF).

Another positive for the Brazilian banks is that the financial crisis has done a great job of helping investors understand where to look for risk. Brazil has a very healthy economy. That said, debt-to-GDP at 60% is less than ideal. If there is a crisis, expect that the financial sector will receive the brunt of it.

Brazilian financials, in the end, offer a compelling long-term opportunity, though not one that's risk-free.

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