NEW YORK (TheStreet) -- Rio de Janeiro's successful bid to host the 2016 Olympic Games underscores the tremendous progress that Brazil has made in recent years, both politically and economically.Despite a hard hit in 2008, Brazil's equity market has improved dramatically in recent months, in a trend that has been tracked by both iShares Brazil ( EWZ) and Market Vectors Brazil Small-Cap ETF ( BRF). For the three-month period ending Oct. 1, BRF jumped 38.01%, while EWZ rose 23.14%. As the country gears up for the Olympic Games, investors should consider adding exposure to this growing marketplace through one of these popular ETFs. (See the Ultimate Guide to Brazil ETFs.) Emerging market companies are excellent ways to diversify your portfolio, but stock prices can be volatile. Both BRF and EWZ give investors access to a portfolio of Brazilian equities, helping to mitigate the security-specific risk of any specific stock. While EWZ is the older and larger of the two Brazil-specific equity ETF funds, BRF may be the better bet as Rio de Janeiro prepares for 2016. Despite differences in fees and trading volume, BRF is the better fund for Olympic investing. Commodities have driven the Brazilian economic boom, and commodity exports make up nearly 10% of output. An improved political climate and efforts to reform the financial system have also strengthened this emerging marketplace. As the country prepares for the Olympics, fundamental weaknesses will be addressed, and improvements in infrastructure and tourism could help to shift some of the pressure of Brazil's economic success off of the country's abundant natural resources.
BRF is well positioned to take advantage of improvements outside of the commodities markets. This small-cap play on domestic investment themes focuses on firms that derive at least 50% of their revenue from selling to the people of Brazil. More than 37% of BRZ's assets are allocated to companies in the consumer discretionary and consumer staples sectors. EWZ's asset allocation, on the other hand, is weighted heavily toward commodities. Top holdings in companies like Brazilian Petroleum Corporation Petrobras ( PBR) and Vale S.A. ( VALE) contribute to EWZ respective allocations of 27.55% and 25.01% to materials and energy. While these companies may be domiciled in Brazil, much of their revenue is driven by exports and demand outside of the country. In a comparison of fees and trading volume, EWZ remains the dominant fund. EWZ's 0.63% management fee is slightly lower than BRF's 0.73% net expense ratio. The three-month average daily trading volumes for EWZ and BRF are 22,505,740 and 223,166, respectively, making EWZ the larger and more liquid fund. The liquidity and investor interest that BRF has attracted since its May inception, however, is nothing to scoff at. Unless investors are trading exceptionally large blocks of stock, BRF offers ample liquidity through its strong trading volume. BRF's slightly larger fee is still reasonable for an international equity fund, and is to be expected when choosing a fund with a smaller-cap focus. In addition to not relying heavily on commodities firms, BRF's portfolio is also well balanced. The top five components in EWZ's portfolio make up more than 45% of the fund, while BRF's top five account for just 22.4%.
BRF's strategy and asset allocation better shield investors from security-specific risk and the dramatic boom-and-bust cycles of the commodities markets. An influx of Olympic consumption could help to fuel the local companies that comprise BRF's small-cap portfolio. Both EWZ and BRF are large, liquid funds that provide good exposure to a Brazilian economy that could continue to flourish as the Olympic Games draw closer. EWZ is a good choice for large-cap commodities-driven exposure. BRF's focus on firms that draw revenue locally, on the other hand, will help to give this fund better exposure to the infrastructure and consumer-spending improvements that generally coincide with the Olympic Games. -- Written by Don Dion in Williamstown, Mass.