The rise of Brazil's middle class over roughly the past decade
is nothing short of remarkable.
[caption id="attachment_55059" align="alignright" width="220"
caption="Former president Luiz Inácio Lula da Silva"]
Prior to Fernando Henrique Cardoso's administration in the late
90's, Brazil's economic history was fraught with tales of woe. From
inept currency management to massive income disparities, Brazil was
a black hole for foreign investment.
However, as the result of successful policy from three
consecutive administrations, Brazil's middle class is thriving.
According to the Brazilian government, the middle class now
constitutes 54% of the population: a remarkable feat considering
that just a generation ago, the majority of the populace were
During former president Lula's administration alone, Brazil was
responsible for lifting
"28 million people out of extreme poverty
and allowing 36 million to enter the middle class, in a country of
This begs the question: how can American investors profit from
the rise of this newly minted middle class?
The most common investment vehicle associated with Brazil is the
iShares MSCI Brazil Index ETF (
). While the EWZ does a fantastic job tracking the Sao Paulo
market, it is a poor instrument to play the Brazilian middle-class
EWZ is heavily weighted towards global commodity giants
) and VALE (
). As a result, the EWZ is often a better proxy for global
commodity demand than it is for Brazil's vibrant middle class.
A better ETF for playing
Brazilian middle class growth
is the Market Vectors Brazil Small Cap ETF (
). Although smaller and less liquid than the EWZ, as its name
indicates, the BRF invests in small cap companies which are more
sensitive to Brazilian middle class consumption
than VALE or PBR. The fund's three largest weightings are consumer
cyclical at 18%, consumer defensive with 15.7%, and real estate
Long-term investors looking to start a position in the BRF
should watch how the ETF reacts at its 200-week moving average
around 39. The BRF has consistently traded above the 200-week since
2008. Should the ETF find support at this level, investors should
consider starting a long position.
Author disclosure: Immediate family is long EWZ, PBR, VALE,