Rio de Janeiro, Brazil. Source: Lima Pix via
Although it might seem like you could throw a dart in any
direction and hit a winning stock right now, global markets may
not be growing as strongly as the U.S. markets would suggest.
Europe is still sagging under the weight of high unemployment
rates, while Japan's economy shrank at an annualized rate of 6.8%
in the second quarter -- its worst contraction since the
earthquake in 2011 -- as a boost in the country's sales tax is
taking its toll on spending.
Yet when it comes to countries that investors typically flock
to, you'll often find Brazil near the top of the list. And it's
no surprise, as Brazil is the seventh-largest economy in the
world with a 2012 gross domestic product of $2.25 trillion,
according to the World Bank.
Not quite an industrialized nation, but not exactly an
undeveloped emerging market, either, Brazil represents what's
perceived to be a perfect blend of growth and sustainability for
Focusing on Brazil
However, for investors who are unfamiliar with Brazilian stocks
or don't have the patience to sift through dozens of annual
reports, purchasing individual stocks may not make much sense. It
was for these investors that the
iShares MSCI Brazil Index ETF
The iShares MSCI Brazil Index, as its name would imply,
invests all of its assets under management (nearly $5.1 billion)
in large-cap and midsized Brazilian companies. The purpose of the
index, as you likely surmised by now, is to track the investment
results of a basket of Brazilian stocks.
Investors in this ETF are exposed to 73 Brazilian companies
across 10 different sectors, with financials (31%), consumer
staples (15.7%), energy (14.9%), and materials (13.3%) making up
the lion's share of the assets. In terms of expense ratio, the
iShares MSCI Brazil Index's 0.61% actually ranks on the low end
of other Brazil-focused funds, which means less money out of your
Sector breakdown as a percentage of market value. Source:
Now that you better understand the makeup of the fund, let's
have a look at three reasons why the iShares MSCI Brazil ETF
might be the perfect overseas addition for your portfolio.
Accommodative domestic policy
In the United States we have the Federal Reserve to thank for our
record low interest rates and economic stimulus known as QE3, and
we can thank policymakers for their efforts to reduce taxes
following the Great Recession. In Brazil, lawmakers are clearly
dedicated to returning Brazil to a state of rapid growth.
Source: Kerry O'Connor via
Earlier this week, Brazil's policymakers announced they were
taking steps to boost lending in the country by as much as $66
billion. They did this primarily by reducing capital requirements
for the country's banks by the equivalent of $6.6 billion --
which could lead to as much as $62 billion in new loan creation
-- and by creating new channels for funds to flow from banks'
reserves requirements into lending, which would make up the
remaining $4 billion.
But this is just a specific example of how accommodative
Brazil's government has been of growth in the country. Through
the first half of 2014, the Brazilian government's monthly
spending has been an average of 11% higher year over year.
What does this mean? It means that Brazil's lawmakers aren't
afraid to stimulate the economy. For the past couple of years,
investors in the U.S. have been enjoying the fruits of the
Federal Reserve's accommodative policy, and it's plausible that
Brazilian companies may follow a path similar to that which the
The right blend of growth and stability
As I mentioned above, the iShares MSCI Brazil ETF has what I
suspect is an optimal blend of growth and stability that could
deliver outperformance in both an expansionary and a contracting
Specifically, the funds' holdings in financials, materials,
industrials, and consumer discretionary companies give it a nice
blend of cyclical stocks that can lead it upward when the economy
is growing. As you probably know, cyclical stocks tend to
outperform benchmark stock indexes in growing economies, but they
can also underperform in contracting economic environments.
These cyclical stocks are balanced by stronghold investments
in consumer staples, utilities, telecom services, and health care
-- and a case could be made for energy as well, as the country is
still in the process of building out its infrastructure. These
basic-needs product and service providers may grow a bit slower
during an economic expansion, but investors love having them in
their portfolios when GDP begins to contract because they're a
stabilizing force. These basic-needs stocks are also a reason why
the iShares MSCI Brazil Index has paid out an impressive trailing
yield of 3.2%.
This growth and sustainability balance, coupled with that U.S.
Treasury-topping yield, could certainly attract income seekers
from abroad and push this ETF higher.
Abundant natural resources
Lastly, despite Brazil's ongoing industrialization, we still have
to remember it's a top producer of a handful of commodities that
provide support for its economy and can be a source of immense
growth if the prices of those underlying commodities take
Ethanol production. Source: Sweeter Alternative via
Take Brazil's oil production as a good example. Prior to 2005
the country was a net importer of oil despite seeing its domestic
production increase close to 1 million barrels from 1997. In
2005, with the addition of new offshore drilling rigs, Brazil was
able to move from net importer to net exporter. By 2010 Brazil
was running a surplus of about 300,000 barrels per day.
What's really remarkable about Brazil is that it also relies
heavily on alternative energy as its primary fuel source. It's
the world's leading supplier of ethanol, producing 17.7 billion
liters each year. Together, its energy efficiency and oil
exporter status should ease many investors' concerns, as it
probably means lower long-term energy costs than a number of its
In addition to being the lead producer of ethanol, Brazil is
the leading producer and exporter of coffee, sugar cane, and
fruit juices; it is the world's biggest exporter of meat,
chicken, and leather; and it has vast reserves of iron ore, along
with timber, copper, platinum, and coal. Once again: diversity,
diversity, diversity! These commodities offer the opportunity for
growth in their own right if underlying prices cooperate. But
even more than that they provide a quick, domestic source of cash
flow for Brazilian companies.
Time to give Brazil a chance?
Brazil is an apparent hotbed of investments. Its abundant natural
resources and diverse economy could provide a perfect blend of
growth, stability, and yield, which investors in the iShares MSCI
Brazil Index might be able to take advantage of. If you're
looking for overseas exposure, you could do much worse than the
iShares MSCI Brazil Index.
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3 Reasons iShares MSCI Brazil Index ETF Shares
originally appeared on Fool.com.
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