As worries continue to build over major emerging markets, many
investors are looking beyond the Asian giants and closer to home.
By doing this, some focus in on one of the giants of Latin America,
Brazil, for potentially better investment opportunities.
However, the South American nation is also facing severe
inflation problems, but its incredible commodity output, rapidly
expanding middle class, and relative lack of competition in South
America, have allowed the nation to skirt by some of the main
issues that are hurting its major BRIC counterparts.
Still, the heavy dependence on commodities can be a double-edged
sword, helping nations when markets are soaring but crushing them
back to earth when commodity prices are floundering. This issue is
particularly the case in Brazil with two of its enormous companies,
Vale, and especially
Investors have developed something of a love-hate relationship
with the South American oil juggernaut as the company has found
some of the few massive oil fields as of late that are in a
(relatively) friendly nation. However, the heavy government control
and ownership of the company is seen as a determent by some, and
the reason for a good deal of PBR's underperformance and not living
up to its potential (see
Latin America ETFs Beyond Brazil
This is best evidenced by the company's most recent earnings
report in which it posted its first quarterly loss in more than a
decade. The company blamed a weaker real-which led to higher debt
and import costs-as the chief reason for the miss, while it also
highlighted a massive expansion in exploration costs,
which moved higher by 400%
in the period.
Even with this expansion, PBR has had little to show for the
extra investment, at least so far. In fact, the company saw
maintenance work and the closure of some wells push second quarter
output lower by 2.4% in year-over-year terms.
Furthermore, since Petrobras doesn't have the biggest refining
capacity, the company has to import refined fuel at market prices.
Yet, since the company is majority-government owned, it often
resells this fuel on the home market at a loss, or keeps margins
extremely low, helping ordinary Brazilians but hampering investor
Are Investors Abandoning Brazil ETFs?
recent Forbes article
, Kenneth Rapoza summed up the situation nicely writing, "Petrobras
is the class state run entity. It doesn't exist to make
shareholders profits. It exists for the commonwealth."
Thanks to this weak earnings trend and the clear impact of
government ownership on the firm, some may be considering avoiding
PBR for the time being. Yet, it is also important to note that for
ETF investors, avoiding Petrobras may take a little more
That is because for those who wish to play a basket approach on
the soaring Brazilian economy, the choice is usually the
iShares MSCI Brazil Index Fund (
. The fund has close to $7.5 billion in AUM and trades more than 15
million shares a day, thoroughly crushing the rest of the space on
both metrics (read
The Comprehensive Guide to Brazil ETFs
However, the fund gives heavy allocations to both types of
Petrobras shares, enough to give the company a 15.4% weighting in
the fund. Clearly, this is a pretty significant allocation,
suggesting that EWZ's return is pretty much driven by just a
handful of companies including the in focus PBR.
Thanks to this reality, many investors may want to consider
cycling into different Brazilian ETFs in order to gain solid
exposure to the region without the influence of the lumbering
Petroleo Brasileiro. For these investors, we have highlighted three
funds below which still offer solid exposure but without the
dominating presence of the government-controlled Petrobras:
Market Vectors Brazil Small Cap ETF (
One of the best ways to avoid the giant Petrobras is by looking
at small caps instead, such as with Van Eck's BRF. This fund tracks
the Market Vectors Brazil Small Cap Index, offering a cap weighted
approach to the smaller companies in the nation.
By tracking this index, the fund has exposure to roughly 70
companies in total, putting no more than 5% in any one firm.
Furthermore, materials make up just 7% of assets, putting assets
instead in cyclical consumer companies and industrials which
account for over half the portfolio (read
Brazil Small Cap ETF Showdown: BRF vs. EWZS
Unlike some of the other funds on the list, the volume on this
one is pretty solid, suggesting relatively tight bid ask spreads.
The product isn't too expensive either, coming in at 59 basis
points a year in fees suggesting it looks to be on par with EWZ
from a total cost perspective.
Global X Brazil Mid Cap ETF (
If you are worried about the volatility of the small cap market,
perhaps a mid cap focus with BRAZ is the way to go instead. The
fund tracks the Solactive Brazil Mid Cap Index, giving exposure to
a basket of medium sized companies, ensuring that Petrobras will be
In terms of BRAZ's exposure profile, the fund is heavily exposed
to utilities-further cutting down on volatility-while consumer
staples and telecoms round out the rest of the top three.
With this profile, a decent amount of large cap assets, and a
low level in growth companies, investors could have a relatively
low beta choice on their hands that gives quality and diversified
exposure to Brazil.
Unfortunately, investors should note that the product is
somewhat expensive at 69 basis points a year, 10 points more than
BRF/EWZ. Additionally, volume is at roughly 13,000 shares a day so
bid ask spreads could be relatively wide, potentially adding to
total costs for large investors.
First Trust Brazil AlphaDEX Fund (
For investors who want more of a large cap focus but are not
willing to write off Petrobras entirely, you still have a quality
option in FBZ. The fund takes a broad look at the market but
evaluates stocks based on a number of growth and value factors
instead of market capitalization levels (see more in the
With this approach, the top 50 stocks are selected, divided into
quintiles and equally weighted in these five groups. However, the
top quintile does receive an outsized weighting, descending to
smaller weights for the worst ranked quintile.
This gives the fund a focus on utilities, basic materials, and
consumer staples while mid and small caps account for roughly 45%
of assets. Meanwhile, Petrobras makes up a very reasonable 2.8% of
the fund, not enough to dominate the holdings profile, but worth
However, investors should note that the product does suffer from
low volume levels and a weak amount of assets. This could
contribute to higher trading costs, making the fund's current
expense ratio of 80 basis points more difficult to swallow.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
GLBL-X BRAZL MC (BRAZ): ETF Research Reports
MKT VEC-BRZL SC (BRF): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
FT-BRAZIL AD (FBZ): ETF Research Reports
PETROBRAS-ADR C (PBR): Free Stock Analysis
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report