The case for a Brazil ETF

Brazil ETFEven if you only occasionally follow financial news, you will have heard of Brazil’s two largest companies – Petrobras and Vale. However, a strong investment case can be made for Brazil in general and gaining exposure through a Brazil ETF.

Strong demand and rising prices for minerals have resulted in tremendous runs for two of Brazil’s largest minerals companies. Petrobras (NYSE: PBR), up 2,022% in the past 5 years, recently made the world’s second-largest oil/gas discovery in 20 years. Vale do Rio Doce (NYSE: RIO), up 1,560% in the past 5 years, is the world’s biggest exporter of iron ore (see our post on Vale in Another Way to Track China’s Growth with ETFs).

But there is more to Brazil than oil, gas and iron ore. A recent article by Martin Spring lays out the case for investing in Brazil. Key points made by Spring include:

Abundant Natural Resources

  • Brazil contains nearly a fifth of the world’s fresh water
  • Carbon-free electricity generation and hydro-power already provides 80 per cent of Brazil’s electricity needs, and two big new dams are being built on the Amazon at a cost of $10 billion.
  • Because it can produce alcohol fuel from sugarcane for prices competitive with petrol, Brazil has been dubbed “the Saudi-Arabia of ethanol.”

Strong economy and favorable investment climate

  • Strong and sustainable economic growth rate of about 5%
  • A foreign trade surplus of about $40 billion a year
  • Large foreign reserves, a strong currency and a buoyant stock market
  • Brazil attracted FDI (foreign direct investment in factories and business operations) of $37 billion in the most recent year
  • World’s third biggest raiser of investment capital via equity issues after the US and China
  • Its international bonds are expected to be granted investment-grade status within two years.

Political stability and emerging middle class

  • A flourishing middle class of 20 million
  • Political stability
  • Strong job creation (5 million new jobs since 2000)
  • Disciplined public finances and trade liberalization
  • Low inflation and falling interest rates

A quick way to get diversifed exposure to Brazil is through an ETF. A well established Brazil ETF is the iShares MSCI Brazil Index Fund (EWZ). The $7.6 billion fund (as of 2.2.08) tracks the MSCI Brazil Index. Although nearly half of EWZ is in Petrobras and Vale, the MSCI Brazil Fund also provides exposure to several large banks and Brazil’s largest integrated steelmaker Companhia Siderurgica Nacional (NYSE: SID), up 4,400% in the past 5 years. Read more at the iShares website.

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