Given the uncertainties about the U.S. economy, many investors are looking at emerging markets for investing opportunities. With China stocks in the doldrums lately, Latin America has been catching the eye of investors. 

Of the 20 countries that comprise Latin America, Brazil, with $2.2 trillion gross domestic product, is the largest and offers the best growth prospects.

About Brazil
Brazil, the only Portuguese speaking country in the region, is the 10th largest economy in the world. Exports include aircraft, electrical equipment, automobiles, ethanol, textiles, footwear, iron ore, steel, coffee, orange juice, and soybeans.

Brazil’s natural resources include iron ore, manganese, bauxite, nickel, uranium, gemstones, wood, and aluminum. Newly discovered crude oil fields off the coast of Rio de Janeiro contain estimated reserves in the 30 billion to 80 billion barrel range. Output from those fields are expected to make Brazil a major crude oil exporter by 2015.

How to Invest in Brazil
The easiest way to invest in Brazil, or in any foreign country, for that matter, is via exchange-traded funds (ETFs). That way, you don’t have to spend time researching individual stocks. As you probably know, most ETFs track the performance of a fixed index of stocks, much the same as an index mutual fund. The advantage of ETFs is that since they trade like stocks, they are easier to get into and out of than mutual funds. In this instance, since there are no mutual funds tracking only Brazil, the question is moot.

Brazil ETFs
Currently, there are more than half a dozen ETFs tracking Brazil stocks. To evaluate ETFs, you need to see at least one-year’s track record, and three years is better. Unfortunately, most Brazil ETFs haven't been around that long. Only one has been in existence three years.

iShares MSCI Brazil Index Fund (EWZ) has only managed to break even in terms of average annual return over the past three years. It did, however, return 10 percent over the past 12-months. It tracks an index of 76 mid- to large-capitalization stocks, mostly in the energy and basic materials sectors.

Two newer funds have racked up more impressive returns, at least over the last 12-months.

Market Vectors Brazil Small-Cap (BRF) tracks an index made up of 62 small- to mid-sized Brazil-based stocks with the heaviest weightings in the consumer, basic materials, and healthcare sectors. The fund returned 36 percent over the past 12-months and 61 percent since its May 2009 inception.

EGShares Brazil Infrastructure (BRXX) tracks an index of only 30 stocks, mostly mid- and large-sized companies with the heaviest weightings in the utility, telecommunications, and industrial sectors. This narrowly focused fund returned 29 percent over the past 12-months and 30 percent since its February 2010 inception.

Picking the ETF that best suits your needs is about balancing returns versus risk. Looking at 12-month returns, Market Vectors Brazil Small-Cap, up 36 percent, did the best, and iShares MSCI Brazil Index, up 10 percent, was the worst.

Evaluating Risk
When considering risk, portfolio concentration is an important factor. Since all three funds focus on a single country, they are inherently riskier than funds that invest in an entire region, say, Latin America, or a broader category such as emerging markets in general.

Within a specific category, ETFs that track only a relatively small number of stocks are more vulnerable to market swings, and thus more risky, than more diversified funds. I already mentioned the total number of stocks tracked in each fund’s description. However, the percentage of the fund’s total assets represented by its top 10 holdings is more significant. The higher the percentage, the riskier the fund.

You can see that number on Morningstar’s Portfolio Holdings (www.Morningstar.com) report. The numbers for the three Brazil funds are iShares MSCI Brazil Index 61 percent, Market Vectors Brazil Small-Cap 38 percent, and EGShares Brazil Infrastructure 54 percent.

By that measure, Market Vectors Brazil Small-Cap is the lowest risk fund and iShares MSCI Brazil Index is the riskiest.

Risk and Return
Considering only Brazil funds, Brazil Small-Cap has recorded the highest one-year return and has the least concentrated portfolio. Conversely, iShares MSCI Brazil Index has the highest risk and lowest historic return.

Relying on 12-month returns is not as good as using longer measures such as three or five years. Unfortunately, most ETFs have not been around long enough to accumulate those track records.

Also, as already mentioned, country specific ETFs are always riskier than investing in more diversified market segments such as emerging markets in general. However, you can use the risk vs. return analysis that I described for any related group of ETF candidates.

The screener on ETFdb is a good resource for finding lists of funds in specific categories such as emerging markets in general or in specific regions such as Emerging Asia Pacific. Get there from the Tools menu on ETFdb’s home page (etfdb.com).

As always, learn as much as you can about the market sector that you choose. The more you know about your investments, the better your results.

published 4/24/11