Can Brazilian Small-Caps Rally as Manufacturing Expands? | Beyond Basic Beta Channel

Investors looking for overseas opportunities in emerging markets have to tread lightly given the COVID-19 pandemic, particularly in Latin America. Nonetheless, ETF investors looking to place their bets on Brazil can do so with small-caps as its economy continues to recover.

“Brazilian manufacturing expanded at a record pace in October, a survey of purchasing managers’ activity showed on Tuesday, as a rise in employment and export orders to new highs helped extend the sector’s strong post-coronavirus recovery,” a Merco Press article said. “IHS Markit’s Brazil manufacturing purchasing managers index (PMI) report was mostly solid, but also showed record high input and output prices due to the persistently weak exchange rate, and a softening of future output expectations.”

ETF investors willing to take a chance can look at the VanEck Vectors Brazil Small-Cap ETF (BRF). The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Brazil Small-Cap Index.

The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes securities of Brazilian small-capitalization companies. A company is generally considered to be a Brazilian company if it is incorporated in Brazil or is incorporated outside of Brazil but has at least 50% of its revenues/related assets in Brazil.

BRF Chart

In the meantime, for ETF investors looking to get exposure to Brazil as a potential bargain should the country stage a comeback in 2021, here are two funds to consider with varying strategies and market caps:

  1. iShares MSCI Brazil Capped ETF (NYSEArca: EWZ): EWZ seeks to track the investment results of the MSCI Brazil 25/50 Index, which consists of stocks traded primarily on B3 (the largest Brazilian exchange). The index is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer of a component exceeds 25% of the underlying index weight, and all issuers with weight above 5% do not cumulatively exceed 50% of the underlying index weight.
  2. WisdomTree Brazilian Real Strategy ETF (NYSEArca: BZF): BZF seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the U.S. dollar. The fund normally invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in investments whose combined performance is tied economically to Brazil. BZF generally will maintain a weighted average portfolio maturity of 90 days or less with respect to the money market securities in its portfolio.

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