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Brazil's Small Cap ETFs

Written By Brian Hicks

Posted June 9, 2009

My friend Frank couldn’t believe I missed Rio’s most famous symbol.

"You didn’t see Christ the Redeemer?," Frank challenged after I got back to Baltimore. His face twisted in disbelief.

"I saw it from a distance plenty of times," I told him calmly, since I had indeed beheld the 100-foot tall statue while trucking around town.

Christ the Redeemer

But what Frank didn’t get was that the small things matter most to me. I prefer the feeling of the streetside stalls, hearing old men  shout to sell their wares.

The most obvious destinations are often a distraction…

And the same goes for the most obvious investments.

Which is what brings me to a brand-new Brazilian small-cap stock ETF available to U.S.-based investors.

It’s full of just the kind of high-powered consumer plays that I found down on the ground in Rio.  Here’s what I mean…

The Market Vectors Brazil Small-Cap ETF

On May 12, 2009, Market Vectors added to its growing assortment of international ETFs by launching its Brazil Small-Cap ETF (NYSE:BRF).

There are other Brazil ETFs, including the gigantic iShares MSCI Brazil Fund (AMEX:EWZ).

EWZ enjoys average volume of over 22 million shares per day. And its main constituents are heavy-duty Brazilian companies like Petrobras (NYSE:PBR) and Vale (NYSE:RIO) that can be found as ADR shares on U.S. exchanges.

BRF, for comparison, holds companies with a base market cap of $150 million—they’re not micro-caps, but BRF’s holdings are far from household names on a global scale.

You know what, though? Sometimes you don’t want to trade a country’s 100-foot stock statue. It may stand strong over the years, but a national emblem like Petrobras can also take a beating on bad news if it’s the first local stock in foreign investors’ minds.

Those Brazilian behemoths are also far more subject to the whims of global commodities markets than are small caps.

So instead of EWZ’s allocation of over 62% to energy and materials stocks, BRF managers have formed a fund that’s heavy on consumer discretionary shares and domestic trends in the Brazilian market.

We find industries like health care and IT in BRF that are totally absent from mega-ETFs like EWZ.

And those low-profile, consumer-driven industries cannot be ignored in a top developing country like Brazil.

Though consumer confidence, i.e. willingness to spend, has dropped in South America’s leading emerging market, Brazilians have largely weathered the storm better than Russia, China, and India—the other members of the BRIC club coined by Goldman Sachs back in 2003.

As investors grow more accustomed to seeing ADRs and international ETFs as top performers, they’re up for a little more risk… for a lot more reward.

A Growing Taste for Global Small Caps

Overall, the fact that a top ETF provider is delving deeper into the Brazilian stock pool says a lot about the safety of investing there.

And to show you the potential returns from this international approach, look at the Claymore/AlphaShares China Small Cap ETF (NYSE:HAO).

HAO, which means "good" in Chinese, is actually the best in China since December, gaining 71% against an impressive 32% average for leading large-cap Chinese ETFs NYSE:CAF and NYSE:EWH!

Time will tell how HAO’s Brazilian counterpart performs against its mega-index counterpart EWZ.

The track record for S&P’s Emerging Markets Small Cap ETF (NYSE:EWX) reflects positively on BRF too.

EWX is up by more than 59% since December, compared to just 2% for the S&P 500!

Whatever the case may be in the early going, expect big things from this small-cap ETF.


Sam Hopkins

P.S. – Small-cap funds and stocks are known for their volatility as much as for their enormous potential returns. But that volatility can be controlled with top-notch research and trading expertise like Ian Cooper brings to his Small Cap Trading Pit readers. SC Trading Pit is mostly U.S.-based, but Ian is well aware of the growing access and advantage of international small-cap ETFs like NYSE:BRF. To learn more about the individual stock angle as well as fund-based small-cap investing, check out SC Trading Pit today: