Six Ways to Invest in Brazil
Companies / Brazil Jul 01, 2010 - 10:27 AM GMTBy: Ron_Rowland
Anyone familiar with international investing knows about Brazil. It’s hard to ignore the fifth largest country in the world by geography and population, the South American commodities powerhouse, and the largest economy in Latin America!
Over the past five years, Brazil’s largest ETF (EWZ) has posted a better than 200 percent cumulative return, while the S&P 500 is just shy of breaking even. Brazil puts the ‘B’ in the BRIC emerging market economies, and there’s a good reason why …
As the global economy falters, emerging markets like Brazil have been enjoying a steady rise in capital inflows and new opportunities. Global infrastructure has driven down the cost of doing business in South America compared to New York City. Although the ride will not always be smooth, Brazil still looks much more attractive compared to any broad-based U.S. investment.
Brazil: The Crown Jewel of The Southern Hemisphere
Brazil is the economic jewel of the Southern Hemisphere. With a mixture of agricultural, mining, manufacturing, and service sectors, Brazil is one of the more diversified emerging markets.
Brazil dominates Latin America with its rich natural resources. It accounts for most of the world’s soybean trade and nearly 80 percent of global orange juice production. Brazil is also one of the few Western hemisphere countries that is energy independent — thanks to ethanol, abundant oil reserves, and hydroelectric power.
But Brazil isn’t satisfied with its inherited resources. Instead, the Brazilian economy is improving nearly every year …
U.S.-backed General Motors (GM) just opened up a $100 million facility in São Caetano do Sul. It’s one of five global product development sites the car maker runs. GM sees the growth potential of the Brazilian auto market and the cheaper skilled labor force Brazil offers.
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| The famous Christ the Redeemer statue has been overlooking this Brazilian harbor for nearly 80 years and is now overlooking a bustling economy. |
But GM isn’t alone …
Fiat, Volkswagen, and Ford are investing in Brazilian engineering and design capacity. That’s because Brazil is expanding its infrastructure. With the expansion, forests are being cleared, roads are being built, and cars are being sold to an employable population.
And with each new mile of road being laid, another car is driven by a happy employee on their way to work in the new Brazil. So it’s no surprise that as the U.S. auto market shrank in 2009, vehicle sales in Brazil grew 11 percent.
There are six ways to gain access into Brazil’s burgeoning economy using easy-to-buy ETFs:
Play #1— Ride the Large-Caps In Brazil (EWZ)
Large-cap stocks represent the largest companies by market capitalization — and Brazil has some great large-cap stocks. The cream of the crop can be found in iShares MSCI Brazil ETF (EWZ).
In two weeks, EWZ will celebrate its tenth anniversary as Brazil’s first ETF. Introduced on July 14, 2000, it has gathered more assets than any other non-U.S. single-country ETF. It currently has more than $9 billion under management.
iShares Brazil holds notable large-cap banks, such as Banco Bradesco Sa Brad and Itau Unibanco, and steel manufacturing giant, Gerdau SA. In addition, EWZ invests in Brazilian energy behemoths OGX Petroleo and Petroleo Brasileiro.
These companies give you a wide swath of the Brazilian economy and keep you away from smaller, sometimes more volatile companies.
Play #2— Hitch Your Portfolio to Brazilian Mid-Caps (BRAZ)
The Global X Brazil Mid Cap ETF (BRAZ) just started trading last week. It’s the first ETF to target the mid-cap companies of Brazil and offers access to the country’s internal growth.
Bruno del Ama, CEO of Global X Funds says …
“Such companies are currently sparsely represented in existing exchange traded fund options, yet are poised to benefit the most from the country’s solid macro fundamentals.”
The reason you might pick mid-caps over the large-caps is the internal play on Brazilian growth. Whereas large-caps tend to have more ties to the global economy, mid-caps are more focused on internal consumption. And BRAZ is a great way to buy Brazil, with less exposure to the global economy.
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| To tap into the Brazil’s internal consumer growth, consider BRAZ or BRF. |
Play #3— Hook onto Small-Caps In Brazil (BRF)
Brazilian small-caps have exploded over the past couple of years. While the rest of the global market has endured everything from panic selling, flash crashes, and central bank-inspired bubbles, Brazil’s smaller companies have enjoyed a relatively steady, substantial climb up the chart.
The easiest way to tap into Brazil’s small-cap growth is with Market Vectors Brazil Small-Cap ETF (BRF). Like BRAZ, BRF is more of a play on the internal growth in Brazil.
More than 30 percent of BRF’s holdings are in the consumer sector and less than 1 percent is in energy. Not only is BRF unlike EWZ from a market cap perspective, but the sector composition is also vastly different.
Play #4— Buy Brazilian Infrastructure (BRXX)
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| Brazil is investing heavily in the infrastructure needed to support its internal growth. |
If anything, Brazil is known for its voracious appetite for internal growth, almost to the exclusion of anything else. While the environment sometimes plays second fiddle to economic concerns, you should still consider the purest way to buy into that internal development …
Launched in February, EGS INDXX Brazil Infrastructure ETF (BRXX) tracks 30 stocks involved in the development and maintenance of Brazil’s physical infrastructure.
Play #5— Go Super-Long Brazil (UBR)
Do you like everything you see about Brazil but want to improve your return with every uptick of Brazil’s market? Then ProShares Ultra MSCI Brazil (UBR) is the ETF for you.
UBR “seeks daily investment results, before fees and expenses, that correspond to 200 percent of the daily performance of the MSCI Brazil Index.” So to go super-long Brazil, consider UBR.
Play #6— Brazilian Defensive Play (BZQ)
As I mentioned earlier, the upward path for Brazil will not always be a smooth one. In fact, since it is still classified as an emerging market, I expect its markets will undergo numerous bear markets while still maintaining long-term growth.
And when those inevitable setbacks come along, you can exploit the opportunity with ProShares UltraShort MSCI Brazil (BZQ).
BZQ is a 200 percent inverse ETF, which means when the Brazil index goes down 1 percent, this fund should go up 2 percent. It’s a leveraged fund so it’s a great way to play the short-term downside moves, but longer-term performance will be a function of the volatility.
What’s Next for Brazil …
You might be thinking that with six different ETFs to choose from, there would be no need for any more.
Well, just like there are more than six ETFs for the U.S., there will likely be more that invest in Brazil. In fact Global X, the company behind BRAZ, has already made plans to introduce a family of Brazil sector funds.
So there you have it. Six ways to invest in Brazil today and more in the pipeline. Good luck!
Best wishes,
Ron
P.S. Are you on Twitter? If so, please follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.
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