Brazil has become a magnet for foreign investors. Is exposure to the country via exchange traded funds (ETFs) right for you?

The Good. Brazil’s macroeconomic changes are setting up the country with economic responsibility and international credibility, writes Cinthia Murphy for IndexUniverse. The country’s taxes are among the highest in the emerging markets, which is keeping the government flush with cash. Inflation is under control, with a target of 5% for 2010. The benchmark lending rate, the Selic, is 10.75%.

Economists put Brazil’s growth at more than 7% for the year, reports Luciana Lopez for Reuters. Brazil’s debt-to-GDP ratio is 41%, yet government spending to pander to the voting masses instead of infrastructure projects has drawn criticism to the ruling party.

President-elect Dilma Rousseff will maintain market-friendly policies such as a free-floating currency, inflation control and fiscal discipline, reports Raymond Colitt for Reteurs. Rousseff will also keep a strong government presence in banking, petroleum and energy, but private companies will not be crowded out. She has also wants to lower interest rates, which are among the world’s highest. [Brazil ETFs: New President, New Rules.]

The Not-So-Good. Brazil still has a long way to go. About one-third of Brazilians lack adequate housing, potable water and live with less than half the minimum wage, and around 10% of the population is illiterate. Additionally, most of the country’s infrastructure is severely inadequate. EGShares Brazil Infrastructure (NYSEArca: BRXX) is a direct way to play this growing need; it’s up nearly 30% in the last six months.

Risks on the Horizon. Brazil is struggling with a strong currency. The appreciated real has decreased exports of commodities and manufactured goods. The government has taken steps to increase taxes on foreign investments. The Central Bank projects inflows of $30 billion in foreign direct investment this year and $45 billion next year. The currency’s strength has benefited WisdomTree Dreyfus Brazilian Real (NYSEArca: BZF), which is up 10% in the last six months.

For more information on Brazil, visit our Brazil category. All in all, Brazil’s economy is one that appears to be on the right track. If things keep moving in this direction, the positives will outweigh the negatives. In addition to the ETFs mentioned above, there are a number of other ways to get exposure to Brazil’s economy:

  • iShares MSCI Brazil Index Fund (NYSEArca: EWZ)
  • Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF)
  • iShares MSCI Brazil Small Cap Index Fund (NYSEArca: EWZS)

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.