Brazil has emerged from the global economic crisis with a stronger financial system and a positive outlook, and the iShares MSCI Brazil Index (EWZ) has responded by rising more than 42% year to date.While much of Brazil's, and EWZ's, success will depend on the continuing recovery of the commodity markets, the country's fundamentals will undoubtedly help support a continued upswing. Brazil's current administration has taken formidable steps to renew the country's financial system, and countries around the globe are eager to invest in this commodities-rich nation. Exchange-traded funds are an excellent way to gain exposure to Brazil, and the ETF industry has responded to the nation's potential with a number of Brazil-themed products. With a three-month average daily trading volume of more than 21 million shares, EWZ dominates the group, but a recent offering from Van Eck ETF group Market Vectors, the Brazil Small-Cap ETF ( BRF), has already attracted ample investor interest. For sophisticated investors interested in currency trading, Wisdom Tree offers the Dreyfus Brazilian Real Fund ( BZF). The three ETFs mentioned are very different in their construction.
As of July 10, EWZ was up 42.13% on the year, and the fund imposes a reasonable 0.63% fee. The top three market sectors represented in EWZ's portfolio are materials, energy and financials, with 27.11%, 26.94% and 18.91% allocations, respectively. Interested investors should keep in mind that this fund is top heavy and focuses on the largest companies in Brazil.
Since BZF is a different type of fund than EWZ or BRF, investors should not expect returns that compare to the other two funds. As of July 10, BZF was up 13.55% for the year. For the one-month period ending July 10, the fund was down 1.68%. BZF is not as liquid as EWZ or BRF and has a three-month average daily trading volume of just 65,187. The fund has a 0.45% expense ratio. Brazil is uniquely positioned to emerge from the global economic slowdown stronger than before. The current government has been aggressive in reforming financial policy and placing countercyclical measures into place. Brazil's top companies have been aggressive in reaching out to the broader global market. The recent unsubscribed IPO of Visanet raised approximately $4.2 billion, with 70% of the investors coming from outside Brazil. The New York Stock Exchange currently lists 31 Brazilian ADRs, with a combined market capitalization of approximately $500 billion. Unless investors clearly understand the risks and rules of currency trading, I would recommend that they choose equity based ETFs like EWZ and BRF to gain access to Brazil's marketplace. EWZ is already an ETF giant, and BRF will likely grow rapidly in the months to come. Whether investors favor the small-cap (BRF) or large-cap (EWZ) approach, Brazil ETFs would be appropriate as a small investment in a well diversified portfolio. Investors looking for a broader exposure to emerging markets including Brazil can check out iShares MSCI Emerging Markets Index ( EEM), Claymore/BNY BRIC ( EEB), SPDR S&P Emerging Latin America ( GML) and Vanguard Emerging Markets Stock ETF ( VWO).