Foreign ETFs Provide Protection and Opportunity: BRICS Edition
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in foreign economies is a great way to inject some geographic diversity into your portfolio. I am not thinking about European economies here; the real money is in the emerging markets. I think it is very important to look for the next economy that will really rocket. However, there are substantial risks with investing in any emerging economy.
The solution to eliminate the risk of trying to be diverse is to diversify your risk. Do not pick and choose your own companies in these foreign countries; use an ETF devoted to the country or region that allows you to take your share of every company in its portfolio. Owning ETF’s means you get full-time, experienced individuals looking into companies, and enough capital to spread the risk out. Let the professionals handle foreign exchanges and companies.
This first foreign ETF article focuses on the BRIC countries, plus South Africa. BRIC stands for Brazil, Russia, India, and China, the most popular emerging economies in the world. South Africa was added later, but the "S" never caught on. Everyone knows about the BRIC countries, but the diversity that ETFs offer and the continued potential of those countries means that getting in before the masses is not as important.
I like Brazil because I feel like it is in the best shape to utilize the wealth from its oil. If it can just crack the offshore drilling problems and minimize the environmental risks it will be a great pick. Obviously there is the somewhat standard problem of graft, but there have been a few high-profile corruption cases that might be the signs of positive change down the line.
The problem of petro-states is very real, as so many see economic stagnation for the masses and a devolution into some form of authoritarian government. Once you do a political and economic assessment you might like Market Vectors Brazil Small-Cap ETF (NYSEMKT: BRF). Small-Cap companies are where it all begins, and provide some of the best growth. This ETF takes positions in many of them and has risen over 12% YTD. When business takes off and they become a bastion of Brazilian economic power this ETF profits greatly.
If you think Brazil can get on its feet economically and become a global power, then starting with the small-caps is good way to go. On the other hand if you are into investing in societal necessities, then Emerging Global Shares INDXX Brazil Infrastructure Index Fund (NYSEMKT: BRXX) might be a better choice for you. Roads and utilities are required for any functioning modern society, and investing in infrastructure might be a smarter way to invest in an economic boom. Although this ETF is only up over 2% YTD.
Russia does strike me as a petro-state, and I do not believe it will uphold international standards when push comes to shove. Investing in any Russian companies is open to the risk of the government's next whim. This might be true of most countries, but Russia has nothing against putting itself first, despite international disapproval and conventions. There is a lot of potential in the Russian economy, but my skepticism lies in its ability to realize that potential.
My Russian ETF of choice would be Market Vectors Russia ETF (NYSEMKT: RSX) the ETF with the most assets and average volume. It is up a little over 7% this year. Always go for safety, especially with Russia. If you are going to try and get a piece of the Russian pie, use an ETF and just focus on the biggest on the block.
India's problems can be traced to its broken political system and incompetent legislature. Graft is rampant, and individuals in government are self-interested. Still, political issues in a stable democracy can be resolved with one election where the people say “no more.” India might get there soon. Despite flagging growth there is still a rising middle class that will shift politics from the rural, illiterate focus to a more sophisticated form.
India has infrastructure and supply chain issues, which is causing its high inflation rate. If the government decides to tackle this problem India's potential could be unlocked rapidly. There are so many good India ETFs to choose from, and they all have excellent YTD returns. WisdomTree India Earnings Fund (NYSEMKT: EPI) is the largest by assets and average volume, which makes it the safest choice. It is up a little under 20% so far this year, which showcases India's potential.
The lack of transparency in China scares me, and there have been some stock scams there in the last few years. Obviously, China is not the only country with this going on, but it is the most closed off of all the countries in this list. However, China does have a massive population and a growing economy. Consumer and infrastructure spending within the country is likely to go up, and it has a strong export economy. There is potential there.
The ETF I would choose for China would not be the largest ETF. It would be SPDR S&P China ETF (NYSEMKT: GXC), the second largest. The reason is that the largest ETF focuses on only the largest Chinese companies, while this one focuses on the entire universe of publicly traded companies available to foreign investors. There are many Chinese ETFs as you can see in the linked list, I would choose the broadest. This ETF is up over 5% this year, while the largest is up only 1%.
South Africa is an honorary member of the BRIC countries. South Africa is the most developed economy in Africa, though it has numerous political issues that you should be aware of, including mining and labor rights. Mining is also what South Africa is known for, though the wine industry is picking up steam the last few years.
There is only one South Africa-focused ETF: iShares MSCI South Africa Index Fund (NYSEMKT: EZA). Watch the current mining strike and wait for it to have an impact or be resolved before making any moves. The ETF is up about 3.5% YTD, but this might erode if things worsen in the mining sector.
You could skip picking and choosing your favorite companies by going with iShares MSCI BRIC Index Fund (NYSEMKT: BKF), which invests in all the BRIC countries. Obviously South Africa is not part of this list, because it is only an honorary member. That ETF is up almost 4% for the year.
Directly investing in foreign countries carries a great amount of risk. These ETFs are a way to minimize the risks. I do not like every country on this list, so if I were to take any positions I would divide my investments up between Brazil and India.
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