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Backdoor Brazil With These ETFs

September 9, 2013 1:40 pm
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Backdoor Brazil With These ETFs

Over the weekend, another batch of solid Chinese economic data was published confirming that the world's second-largest economy may be on firmer footing than critics surmised a few months ago.

Since June 24, the SPDR S&P China ETF (NYSE: GXC) is up 20.2 percent. In past years of emerging markets ETFs performing well, what was good for China was good for Brazil.

As many investors know now, Brazil is highly dependent on China as a purchaser of commodities produced in Latin America's largest economy. The correlation between ETFs tracking these economies can, in some cases, by intimate. For example, over the past three years, GXC and the iShares MSCI Brazil Capped ETF (NYSE: EWZ) have a correlation of 0.76, according to State Street data.

Although GXC and other large-cap China ETFs started rebounding a couple of months ago, it has taken longer for EWZ to get in on the act. Due to a plunging currency, tepid commodities demand, economic growth that looks more like the U.S. or Japan and other other factors, Brazilian equities entered a bear market earlier this year. Now, that bear market is about to become a new bull market, but Brazil-specific ETFs have a tendency to disappoint. The good news is investors looking for Brazil exposure without the commitment of a single-country ETF have plenty of choices.

Related: Getting ‘Real' About Brazil ETFs.

PowerShares BLDRS Emerging Markets 50 ADR Index Fund (NYSE: ADRE)
ADRE tracks the BNY Mellon Emerging Markets 50 ADR Index, which is a cap-weighted collection of some of the most familiar emerging markets stocks that are listed in the U.S. That means ADRE's Brazilian holdings include infamous Petrobras (NYSE: PBR) and Vale (NYSE: VALE), though to be fair, those stocks have been perking up in recent weeks.

Although ADRE is not a pure play on Brazil, the ETF's almost 30.7 weight to the country is enough to give investors exposure to a rebound in Brazilian stocks without the commitment of a fund like EWZ. Brazil is ADRE's largest country weight followed by China at 24.8 percent and Mexico at 10 percent. ADRE, which has $234.3 million in assets under management, is up 11.8 percent since June 24.

WisdomTree Emerging Markets Dividend Growth Fund (NYSE: DGRE)
Brazil's dividend scene is a good news/bad news scenario. The good news is the government requires some companies there to payout 25 percent of profits in the form of dividends. The bad news is that is not a guarantee there will not be dividend cuts.

"Markit Dividends expect an 8% fall in pay-outs to shareholders to 60 billion Brazilian real this year," said the research firm in a report published in late July.

"The decline in the aggregate change over 2012 was primarily related to cuts from Petrobras, Vale and most Utility companies (who were forced to cap their charges)," said Markit. The new WisdomTree Emerging Markets Dividend Growth Fund, new as in barely six weeks old, screens companies based on long-term earnings expectations and return on assets and equity in an effort to find the best future sources of dividend growth.

Brazil is the new ETF's largest country weight at 15.2 pecent, but DGRE also allocates 20.3 percent of its combined weight to Russia and China, two of the largest dividend payers in dollar terms in the developing world.

For more on ETFs, click here.

Disclosure: Author is long EWZ.

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