Why You Should be Eyeing Brazilian Small Caps

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Brazil’s hosting of the recent World Cup seemingly put all eyes on the Portuguese-speaking South American nation in May and June. My colleague Nicholas Vardy wrote a column on investing in Brazil, perpetually regarded as “the country of the future,” and I myself penned an ETF Talk on iShares MSCI Brazil Capped (EWZ), an exchange-traded fund (ETF) that tracks the Brazilian economy.

Once the soccer tournament ended, all that attention vanished rapidly. However, with EWZ rising in the month and a half since I covered it, I thought it would be fruitful to once again focus on Brazil. But this time, we will feature a smaller component of the country’s stock market: small caps.

Market Vectors Brazil Small-Cap ETF (BRF) is a fund that follows the performance of an index which tracks Brazilian small-capitalization companies. For the purposes of the index, a company is considered Brazilian if it is incorporated in that country or generates at least half of its revenues in Brazil. BRF has gained 1.69% this year, though it recently has recovered from a major decline. This fund offers a dividend yield of 1.78%.

BRF_073014

BRF has holdings in a wide variety of sectors, chiefly in consumer cyclical, 28.37%, with smaller weightings in utilities, 14.92%; real estate, 14.35%; consumer defensive, 14.21%; and industrials, 10.25%, among others. This ETF’s top 10 holdings make up only 27.97% of its total assets. The top five of these companies are CIA Hering SA, 3.41%; SUL America –UNT N2, 3.16%; Odontoprev SA, 2.99%; CIA Saneamento De Minas Gerais-COPASA MG, 2.87%; and Fii Btg Pactual Corp Office, 2.85%.

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iShares, the ETF provider that offers EWZ, also features a Brazilian small-cap fund: iShares MSCI Brazil Small-Cap (EWZS). EWZS seeks investment results that match those of a free float-adjusted market capitalization index designed to measure the performance of Brazilian equity securities in the bottom 14% of Brazil’s market, as measured by market capitalization. This ETF has lost 0.20% this year. However, just like BRF, EWZS has been recovering from a large drop. EWZS features a dividend yield of 1.87%.

EWZS_073014

EWZS has the same broad sector investment as BRF, with roughly similar weightings: consumer cyclical, 27.16%; real estate, 17.77%; consumer defensive, 14.46%; industrials, 14.41%; and utilities, 11.91%, among others. The fund’s top 10 holdings represent 29.48% of its total assets; the top five of these companies are Equatorial –ON NM, 5.09%; CIA Hering SA, 4.21%; MRV –ON NM, 3.12%; MILLS –ON NM, 2.74%; and Sao Martinho SA, 2.64%.

I hope these two funds from the small-cap segment of Brazil’s economy give you a new perspective of that country. As seen in the charts here, Brazilian small-cap funds are gaining ground after a relatively recent tumble. EWZ, representing the whole Brazilian market, is also on the rise, meaning that now may be a good time for you to consider investing in companies that are based in the host nation of the latest World Cup.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

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In case you missed it, I encourage you to read my article from last week about a pair of Chinese economy ETFs. I also invite you to share your thoughts below.

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