By Michael Venuto

At the ETF Think Tank, we often say “don’t think alone” (a pun from our Happy Hour). When it comes to making sense of markets, investing and all aspects of the ETF industry, thinking through questions and issues together is not only productive, but it’s also enlightening and fun.

It turns out that collective thinking seems to have universal appeal. One of the more surprising things we’ve discovered in this effort to discuss, educate and learn together is that we have come to find community in places we may not have expected. In 2022, we found community in Brazil.

Brazil is one of the largest emerging markets and a commodities powerhouse. Like many emerging economies, it knows too well what inflation—and occasionally hyperinflation—feels like; it knows what double-digit interest rates do to markets and the economy; and it knows how U.S. Federal Reserve decisions and the strength of the dollar can make or break a year.

When Michael Gayed @leadlagreport first mentioned Brazil on our daily lunchtime Twitter Spaces conversations (you should join us!) in early January, we discovered a lot of engagement and interest from Brazilian investors, who are trying to navigate markets as we are, and which culminated in a great discussion with Brazilian strategist Fernando Ferreira.

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We should probably mention that we now have an in-house Brazilian since Cinthia Murphy @MurphyCinthia joined as the Head of Research for the ETF Think Tank last month. Originally from Brazil, where her family still lives, she brings a first-hand experience to the conversation. But that’s not why we are talking about Brazil and ETFs today.

A lot of the market themes we are talking through these days in the U.S., from inflation to growth concerns to decentralization, are the same south of the Equator.

In Brazil, as Cinthia pointed out, there’s a lot of excitement for Bitcoin, driven by a cultural distrust of centralized government. Michael Venuto @Michael_Venuto recently participated in a CoinDesk discussion where that exact topic came up in a conversation about the state of Blockchain and Bitcoin were discussed by @ChicaoBulhoes representing Rio de Janeiro.

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Since we have Brazil on the mind, and eyes are on whether emerging markets are an opportunity for U.S. investors in 2022, we decided to offer a quick ETF Think Tank review of the U.S.-listed ETFs focused on Brazil.

Concentrated Opportunities

Despite the size and scope of the Brazilian economy, U.S. ETF investors only have eight ETFs with which to access that market.

Our ETF Think Tank data shows that the combined assets invested in these ETFs is about $5.9 billion, and almost 90% of that AUM sits in the iShares MSCI Brazil ETF (EWZ).

The overall expense ratio of this category is rather high at 74.9 bps (or roughly $75 per $10,000 invested), but due to the asset concentration in EWZ, the average weighted expense ratio is only 58.3 bps.

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Beyond EWZ, there is another large cap traditional beta Brazil equity ETF, the Franklin FTSE Brazil ETF (FLBR). FLBR has an expense ratio of only 19 bps and has 85% overlap to EWZ in portfolio holdings. But EWZ still dominates asset gathering despite its heftier price tag of 59 bps because many have come to see EWZ as a large and liquid proxy for the Brazilian market.

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There are two leveraged and one inverse ETFs focused on Brazil. The assets in the combined leveraged funds is $108 million versus only $19 million in the inverse fund. That disparity in total assets implies investors have a long bias when it comes to the opportunity in Brazil.

There is also one multi-factor ETF from First Trust focused on Brazil, the First Trust Brazil AlphaDEX Fund (FBZ). FBZ was launched in 2011 and employs the AlphaDEX methodology First Trust is known for, where stocks are selected based on several growth and value factors, and ranked by how they score across these metrics in a portfolio that has sector constraints and is organized around quintiles. You can read all about this investment process here, but the gist of this approach is to offer investors a broad-market-like risk profile while chasing outperformance. But FBZ has only garnered $12 million in assets.

Finally, there are two small cap Brazil-focused ETFs with similar fees; however, they look very different in portfolio composition with only 39% overlap.

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After a few years of difficult performance, Brazil is experiencing an exciting start to 2022 due to price inflation in commodities. As an emerging market, it also seems to click that “attractive valuation” box many investors are looking for as the growth story falters.

What’s interesting is that is appears more precise ETFs focused on Brazil would benefit investors allowing them more granular access that can be used both strategically and tactically, but is there appetite? The data suggests most allocators just prefer the expensive beta available through EWZ, so creating new tools that disrupt that dominance may not be easy even if it may make sense.

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Originally published by Toroso Investments on February 9, 2022.

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