ETFs Are a Way Into Brazil

NEW YORK ( TheStreet) -- I write many articles about building narrow exposures in portfolios and also about avoiding parts of the market that seem like blatant trouble spots. Obviously, with a portfolio of individual stocks it's easy for a do-it-yourselfer to pick specific names in such a way as to avoid whatever he wants to avoid and capture whatever he wants to capture ( easy is a reference to the access, not the analysis). Obviously, not everyone wants stocks only -- exchange-traded funds are a popular tool that can allow for implementing specific inclusions and exclusions for people who take the time to look under the hood and do a little spreadsheet work.

Brazil can be used as an example. There are broad-based funds like the iShares MSCI Brazil Index Fund ( EWZ) , the Global X Brazil Mid Cap ETF ( BRAZ) and the Market Vectors Brazil Small Cap ETF ( BRF). These funds, while each having their own sector biases, offer diversified access. Generally, I prefer narrower access and anyone agreeing with that idea has plenty of choices in terms of ETFs, individual stocks or a combination of both.

Someone interested in financial exposure in Brazil, for example, could buy the Global X Brazil Financials ETF ( BRAF) and be done with it. Some portion of the financial sector allocation for the entire portfolio could go into this fund and be the total allocation to Brazil. After all, Brazil's banks generally weathered the financial crisis fundamentally far better than the U.S. and European banks and looking ahead seem to face fewer systemic threats.

Take a glance under the hood and you'll see names like Itau Unibanco ( ITUB) and Banco Bradesco ( BBD) -- these are names that anyone interested in Brazilian financials should be familiar with. Beyond those two names, however, there are unlikely to be too many familiar names which could be a reason to seek other ways into the country. The lack of familiarity makes the Brazil Financial ETF more difficult to analyze.

The financial sector, obviously, isn't the only way into Brazil. Anyone who has studied the country could reasonably conclude there might be three or four ways in for them along with one or two they would avoid. For anyone wanting Brazil, I think materials is one way in, as is infrastructure (think utilities and industrials) and consumer items (things that the ascending middle class in Brazil can now afford that it couldn't before).

For a while, I've owned the iShares Emerging Market Infrastructure Fund ( EMIF), which has a 28% weight to Brazil. I've also owned Vale ( VALE), the mega-cap miner which combines for about a 3% portfolio weight (the Vale position plus the Brazil portion of EMIF).

There are many ETFs available for investors looking for narrow exposure in Brazil but who may not be comfortable with individual stocks. Obviously, an investor could simply make a meaningful commitment to one of the sector funds from Global X. In addition to the financial fund there is also the Global X Brazil Consumer ETF ( BRAQ), or the EG Shares INDXX Brazil Infrastructure Index Fund ( BRXX), both of which offer very specific exposure to the country.

A better strategy might be to cobble together several funds from different segments of the market. As I mentioned, the iShares Emerging Market Infrastructure Fund has a 28% weight in Brazil which is mostly utilities. Combining that fund with funds like the EG Shares Emerging Markets Consumer ETF ( ECON), with its 15% weight to Brazil, and the iShares Emerging Market Materials Sector ETF, with its 30% weight to Brazil, gives a more diversified exposure to the country.

This can also build an exposure to other countries that might have a large weighting in the funds. For example two of the funds, ECON and EMMT, are both heavy in South Africa. One other holding, maybe an individual stock, and this country would also have a large presence in the portfolio.

This wouldn't work for smaller countries in these funds like Malaysia or Indonesia but there are ETFs for those countries.

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At the time of publication, Nusbaum held EMIF, VALE and BRXX in personal or clients' holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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