Case Study: BRIC Investing with ETFs

By: admin

Case Summary

Christopher is revisiting his portfolio and has decided to expand his investing horizons beyond the shores of the U.S. to the large, yet emerging markets of Brazil, Russia, India and China, also known as the BRIC markets.

Through research, Christopher discovers that, despite their claims, active mutual fund managers charge high fees while consistently underperforming their benchmarks.  Gaining exposure through ETFs is a better solution, but which ones?

Analysis

Investors seeking to gain exposure to the BRIC markets have several choices when it comes to exchange traded funds.  However, when investing in emerging markets, investors need to be on top of potential issues such as liquidity, fund concentration, expense ratios and tax efficiency.
To make effective investment decisions, investors will need to be clear on their goals and why they are investing in the BRIC markets.  Seeking income?  International diversification? Exposure to fast growing sectors?  Protection from inflation and a weakening dollar?
All of these goals and more are achievable through exchange traded funds.

Portfolio Recommendations

To minimize issues with liquidity and portfolio concentration, Christopher should start with one of the larger ETFs that specializes in the emerging markets.

The most popular ETF is the $26 billion iShares MSCI Emerging Markets Index Fund (EEM) which tracks an index that captures 85% of the market capitalization of the emerging markets.  Vanguard has a similar offering with a lower expense ratio of only 0.25% – the $7 billion Vanguard Emerging Markets ETF (VWO).

Other ETFs that capture most or all of the emerging markets include State Street’s SPDR S&P Emerging Markets ETF (GMM) and PowerShares FTSE RAFI Emerging Markets Portfolio (PXH).

Once he has a broad based position established, Christopher can look into ETFs that specialize by country, sector or asset class.  For example,Van Eck Global recently launched the Market Vectors Brazil Small-Cap ETF (BRF) while WisdomTree introduced the WisdomTree Dreyfus Emerging Currency Fund (CEW).

Additional portfolio suggestions are available in the special report Investing in Emerging Markets with Exchange Traded Funds.