3 Reasons iShares MSCI Brazil Index ETF Shares Could Rise

Brazil is a hotbed for foreign investment dollars. Find out why the iShares MSCI Brazil Index ETF could be the right fit for investors looking to add foreign investment exposure to their portfolio.

Aug 24, 2014 at 5:00PM

WwwRio de Janeiro, Brazil. Source: Lima Pix via Flickr.

Although it might seem like you could throw a dart in any direction and hit a winning stock right now, global markets may not be growing as strongly as the U.S. markets would suggest. Europe is still sagging under the weight of high unemployment rates, while Japan's economy shrank at an annualized rate of 6.8% in the second quarter -- its worst contraction since the earthquake in 2011 -- as a boost in the country's sales tax is taking its toll on spending. 

Yet when it comes to countries that investors typically flock to, you'll often find Brazil near the top of the list. And it's no surprise, as Brazil is the seventh-largest economy in the world with a 2012 gross domestic product of $2.25 trillion, according to the World Bank. 

Not quite an industrialized nation, but not exactly an undeveloped emerging market, either, Brazil represents what's perceived to be a perfect blend of growth and sustainability for investors.

Focusing on Brazil
However, for investors who are unfamiliar with Brazilian stocks or don't have the patience to sift through dozens of annual reports, purchasing individual stocks may not make much sense. It was for these investors that the iShares MSCI Brazil Index ETF (NYSEMKT:EWZ) was created.

The iShares MSCI Brazil Index, as its name would imply, invests all of its assets under management (nearly $5.1 billion) in large-cap and midsized Brazilian companies. The purpose of the index, as you likely surmised by now, is to track the investment results of a basket of Brazilian stocks.

Investors in this ETF are exposed to 73 Brazilian companies across 10 different sectors, with financials (31%), consumer staples (15.7%), energy (14.9%), and materials (13.3%) making up the lion's share of the assets. In terms of expense ratio, the iShares MSCI Brazil Index's 0.61% actually ranks on the low end of other Brazil-focused funds, which means less money out of your pocket. 

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Sector breakdown as a percentage of market value. Source: iShares

Now that you better understand the makeup of the fund, let's have a look at three reasons why the iShares MSCI Brazil ETF might be the perfect overseas addition for your portfolio.

Accommodative domestic policy
In the United States we have the Federal Reserve to thank for our record low interest rates and economic stimulus known as QE3, and we can thank policymakers for their efforts to reduce taxes following the Great Recession. In Brazil, lawmakers are clearly dedicated to returning Brazil to a state of rapid growth.

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Source: Kerry O'Connor via Flickr.

Earlier this week, Brazil's policymakers announced they were taking steps to boost lending in the country by as much as $66 billion. They did this primarily by reducing capital requirements for the country's banks by the equivalent of $6.6 billion -- which could lead to as much as $62 billion in new loan creation -- and by creating new channels for funds to flow from banks' reserves requirements into lending, which would make up the remaining $4 billion.

But this is just a specific example of how accommodative Brazil's government has been of growth in the country. Through the first half of 2014, the Brazilian government's monthly spending has been an average of 11% higher year over year. 

What does this mean? It means that Brazil's lawmakers aren't afraid to stimulate the economy. For the past couple of years, investors in the U.S. have been enjoying the fruits of the Federal Reserve's accommodative policy, and it's plausible that Brazilian companies may follow a path similar to that which the U.S. took.

The right blend of growth and stability
As I mentioned above, the iShares MSCI Brazil ETF has what I suspect is an optimal blend of growth and stability that could deliver outperformance in both an expansionary and a contracting economy.

Specifically, the funds' holdings in financials, materials, industrials, and consumer discretionary companies give it a nice blend of cyclical stocks that can lead it upward when the economy is growing. As you probably know, cyclical stocks tend to outperform benchmark stock indexes in growing economies, but they can also underperform in contracting economic environments.

These cyclical stocks are balanced by stronghold investments in consumer staples, utilities, telecom services, and health care -- and a case could be made for energy as well, as the country is still in the process of building out its infrastructure. These basic-needs product and service providers may grow a bit slower during an economic expansion, but investors love having them in their portfolios when GDP begins to contract because they're a stabilizing force. These basic-needs stocks are also a reason why the iShares MSCI Brazil Index has paid out an impressive trailing yield of 3.2%.

This growth and sustainability balance, coupled with that U.S. Treasury-topping yield, could certainly attract income seekers from abroad and push this ETF higher.

Abundant natural resources
Lastly, despite Brazil's ongoing industrialization, we still have to remember it's a top producer of a handful of commodities that provide support for its economy and can be a source of immense growth if the prices of those underlying commodities take off.

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Ethanol production. Source: Sweeter Alternative via Flickr.

Take Brazil's oil production as a good example. Prior to 2005 the country was a net importer of oil despite seeing its domestic production increase close to 1 million barrels from 1997. In 2005, with the addition of new offshore drilling rigs, Brazil was able to move from net importer to net exporter. By 2010 Brazil was running a surplus of about 300,000 barrels per day.  

What's really remarkable about Brazil is that it also relies heavily on alternative energy as its primary fuel source. It's the world's leading supplier of ethanol, producing 17.7 billion liters each year. Together, its energy efficiency and oil exporter status should ease many investors' concerns, as it probably means lower long-term energy costs than a number of its peers.

In addition to being the lead producer of ethanol, Brazil is the leading producer and exporter of coffee, sugar cane, and fruit juices; it is the world's biggest exporter of meat, chicken, and leather; and it has vast reserves of iron ore, along with timber, copper, platinum, and coal. Once again: diversity, diversity, diversity! These commodities offer the opportunity for growth in their own right if underlying prices cooperate. But even more than that they provide a quick, domestic source of cash flow for Brazilian companies.

Time to give Brazil a chance?
Brazil is an apparent hotbed of investments. Its abundant natural resources and diverse economy could provide a perfect blend of growth, stability, and yield, which investors in the iShares MSCI Brazil Index might be able to take advantage of. If you're looking for overseas exposure, you could do much worse than the iShares MSCI Brazil Index.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Nike. It also recommends BMW. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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