Are BRIC ETFs in Trouble? – ETF News And Commentary
Over the past decade, the economies of Brazil, Russia, India, and China (collectively known as the BRICs) have caught investor attention thanks to their impressive growth rates and low debt levels compared to developed nations.
However, they have been uncertain picks as of late, as many companies in these nations are facing some serious troubles. That is largely due to a push away from large caps in these ‘overbought’ emerging markets, and towards smaller nations around the globe which may be the next leg of growth for the developed world.
This trend could mean that investors may want to avoid BRIC ETFs at this time, as many are expected to underperform. In fact, the International Monetary Fund cut its forecast for these nations twice last year for both 2012 and 2013.
Furthermore, on January 23, the agency once again trimmed its growth estimates for some countries. China and India experienced a cut, leaving projected rates for Brazil, Russia, China and India to be, respectively, 4.0%, 3.7%, 8.2% and 5.9% in 2013.
It also hasn’t helped that there has been optimism surrounding the slowly recovering U.S. market, so a domestic approach could be in the cards for the near future. The IMF recently upped its forecast for the U.S. The nation is now projected to grow 3% in 2013, up from previous estimate of 2.9%.
Moreover, there are other drivers that might shift investors’ focus from BRIC nations. These include the monetary stimulus package in Europe and Japan that provides a much-needed relief to their funds as well as expectations of above-market performances by some other country ETFs.
Further, there are other country ETFs like Thailand, Malaysia, Philippines, Mexico and Turkey, that offer relatively better risk-reward outlooks, at least at this time.
With this backdrop, some of the BRIC ETFs might very well be weak picks for investors in 2013. Highlighted below are some of the funds which can be turned down in the near term by those seeking more emerging market ETF exposure.
iShares MSCI BRIC Index Fund (BKF) is a Rank #4 or Sell rated ETF which tracks the MSCI BRIC Index. It tracks the performance of roughly 313 securities with a 70% concentration on China and Brazil and close to 15% on Russia and India.
The ETF allocates around 26.2% of its total assets in the top 10 holdings. BKF charges 66 basis points as expense ratio and has an asset base of $809.6 million. It returned 13.5% in 2012.
SPDR S&P BRIC 40 ETF (BIK) is a Rank #4 or Sell rated ETF. The fund tracks the S&P BRIC 40 Index which focuses in on a subset of the constituents of the S&P/IFC Investable (S&P/IFCI) country indexes for Brazil, Russia, India and China. It has an asset base of $342.0 million and charges 50 basis points as expense ratio.
China dominates the holdings of this fund with more than 50% of assets and is trailed by hearty levels of exposure to Russia (21%) and Brazil (17%) while Indian stocks make up a small portion. BIK returned around 12.5% in 2012.
Guggenheim BRIC ETF (EEB) tracks the Bank of New York Mellon BRIC Select ADR Index which invests in a universe of depository receipts from any of the BRIC nations.
The ETF has an asset base of $387 million and expense ratio of 60 basis points. However, unlike its other two counterparts, this fund has tilted towards Brazil with more than 40% of holdings, China with close to 35% and India with around 10% of share. The fund gained around 5.54% during 2012 after a huge 21.1% decline in 2011.
Despite the handsome returns last year, these three large-cap oriented ETFs did not kick start 2013 nicely. All three have been in the red, despite a positive run for many other emerging markets.
Another weak point in the three above mentioned fund is their lesser share in India which is more-or-less better placed in the BRIC region. Unlike China, India is not highly dependent on exports to developed countries and relies more on domestic demand that makes it somewhat resilient to the global recession.
Further, a set of reformative measures, aimed primarily at bringing in foreign direct investment, have created a buzz in the recent months for the country. For these reasons, investors may want to look elsewhere for their emerging market exposure until these nations can turn things around.