brazil etfs

Executive Summary

  • Abundant natural resources, strong economy and political stability are basis for long term positive growth outlook of 5%
  • Rising demand and prices for commodities and steel are behind tremendous run in Brazil’s largest companies – Petrobras and Vale
  • Ways to gain exposure with ETFs:

Pure Play: EWZ

Currency (Real): BZF

BRIC: EEBBIKBKF

Latin America: ILFGML

Global Steel: SLX

 

Investment case

Even if you only occasionally follow financial news, you will have heard of Brazil’s two largest companies –Petrobras and Vale. However, a strong investment case can be made for Brazil in general and gaining exposure through a Brazil ETF.

Strong demand and rising prices for minerals have resulted in tremendous runs for two of Brazil’s largest minerals companies.Petrobras (NYSE: PBR), up 2,022% in the past 5 years, recently made the world’s second-largest oil/gas discovery in 20 years. Vale do Rio Doce (NYSE: RIO), up 1,560% in the past 5 years, is the world’s biggest exporter of iron ore (see the ETF Commentary post on Vale in Another Way to Track China’s Growth with ETFs).

But there is more to Brazil than oil, gas and iron ore. A recent article in MoneyWeek by Martin Spring lays out the case for investing in Brazil. Key points made by Spring include:

Abundant Natural Resources

* Brazil contains nearly a fifth of the world’s fresh water Carbon-free electricity generation and hydro-power already provides 80 per cent of Brazil’s electricity needs, and two big new dams are being built on the Amazon at a cost of $10 billion.

* Because it can produce alcohol fuel from sugarcane for prices competitive with petrol, Brazil has been dubbed “the Saudi-Arabia of ethanol.”

Strong economy and favorable investment climate

*Strong and sustainable economic growth rate of about 5%

*A foreign trade surplus of about $40 billion a year

*Large foreign reserves, a strong currency and a buoyant stock market Brazil attracted FDI (foreign direct investment in factories and business operations) of $37 billion in the most recent year

*World’s third biggest raiser of investment capital via equity issues after the US and China

*Its international bonds are expected to be granted investment-grade status within two years.

Political stability and emerging middle class

*A flourishing middle class of 20 million

*Political stability Strong job creation (5 million new jobs since 2000)

*Disciplined public finances and trade liberalization

*Low inflation and falling interest rates

 

Overview

A quick way to get diversifed exposure to Brazil is through an ETF. A well established Brazil ETF is the iShares MSCI Brazil Index Fund (EWZ).

The $7.6 billion fund (as of 2.2.08) tracks the MSCI Brazil Index. Although nearly half of EWZ is in Petrobras and Vale, the MSCI Brazil Fund also provides exposure to several large banks and Brazil’s largest integrated steelmakerCompanhia Siderurgica Nacional(NYSE: SID), up 4,400% in the past 5 years.

Other ways to play Brazil

While EWZ is the only strictly Brazil ETF, there are other ETFs that provide substantial exposure to Brazil while diversifying some of the single country and industry risks.

For example, the iShares S&P Latin America 40 Index Fund (ILF) has significant holdings in Petrobras (16%), Vale (21%) and SID (5%) while also holding other Latin American leaders such as wireless giant America Movil (NYSE: AMX) and Mexican stalwarts Cemex(NYSE: CX) and Telmex (NYSE:TMX).

For investors that like the prospects of Brazilian steel, but want to shy away from exposure to financials or oil, check out Van Eck Global’s Market Vectors Steel ETF (SLX). SLX actually has a more concentrated combined exposure to Brazilian steel companies Vale (12.7%), Gerdau (5.9%), and SID (5.7%) than does EWZ.

For yet another way to gain exposure to Brazil, see our ETF Commentary post Claymore ETF Provides 4 in 1 that covers the Claymore/BNY BRIC ETF (EEB) which is over 50% weighted towards Brazil.

 

Top Performers

Largest Brazil ETF

MSCI Brazil Index Fund (EWZ) – $9.7 billion

Largest BRIC ETF

Claymore-BNY BRIC ETF (EEB) – $1.3 billion

Largest Latin America ETF

iShares S&P Latin America 40 Index Fund (ILF) -$4.7 billion

 

See the directory.