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Top Yielding ETFs

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Although emerging markets have been weak in months past, the region still attracts a great deal of interest among investors of all stripes. These nations seem poised to dominate the economy in future years and while some are slowing down right now, their growth rates still put developed economies to shame. Yet, thanks to these slowdown fears, some are beginning to grow concerned about the major emerging nations, specifically India and China. As a result, a number of smaller countries, such as Brazil and Indonesia, are attracting more interest from those who are seeking greater diversity in their holdings (see India ETFs: Behind The Crash).

Brazil in particular has attracted a great deal of interest from ETF investors as the nation remains an intriguing choice for exposure beyond the two largest BRIC economies. Although the country still has its problems, it is one of the more dynamic commodity producers and sees much more stability from a geopolitical perspective than any of its other BRIC counterparts. Thanks in part to this, Brazilian assets have seen the launch of several products targeting not only various capitalization levels, but sectors as well in ETF form. Yet even though there is a wealth of choices, most investors continue to flow into a single ETF for their Brazilian exposure, the iShares MSCI Brazil Index Fund (EWZ - ETF report).

The popular fund is a solid product that has built up an enormous amount of assets since its inception more than a decade ago at just under $9.4 billion AUM. The fund is also an extremely popular trading tool, changing hands close to 16 million times a day. While the fund may be very well-known, its actual holdings leave much to be desired (read Top Three BRIC ETFs).

EWZ holds 84 securities in total but puts a large amount of its assets in the top ten holdings at close to 60%. This gives the fund a heavy concentration on large cap equities, which can often reduce volatility but can cut down on growth as well. Furthermore, many large caps tend to do business in a variety of markets around the world suggesting that some firms, such as top ten holding Ambev, may derive a significant portion of their return from markets outside of Brazil.

Beyond this, EWZ is also heavily concentrated in a few sectors and individual securities as well. Basic materials and financial services combine to make up roughly 50% of total assets, while next to nothing is left for communication, real estate, tech, or health care. Furthermore, two companies, Petrobras (PBR - Analyst Report) and Vale (VALE - Analyst Report), when adding up all their shares classes that are represented in EWZ, make up 18% and 14% of the fund, respectively. This suggests that EWZ is heavily concentrated in just two firms and that a great deal of Brazilian companies do not matter very much to the performance of EWZ over the long term (see Go Local With Emerging Market Bond ETFs).

Luckily for investors seeking more diversified exposure, a number of quality alternatives are available. This is especially true in the small cap Brazilian ETF space where investors have two options to choose from. Both of these funds focus on pint sized securities that could offer more of a ‘pure play’ on the Brazilian economy allowing many to get in on ground floor of the growth story in the nation. While either choice could make for a good alternative to EWZ, there are a few key differences that investors need to be aware of between the two Brazil Small Cap ETFs on the market today:

Market Vectors Brazil Small-Cap ETF (BRF - ETF report)

The leader in the space, BRF tracks the Market Vectors Brazil Small-Cap Index, a rules-based, modified market cap-weighted, float-adjusted index intended to give investors exposure to Brazilian small-cap companies. The product holds 73 securities in total, and unlike its large cap counterpart, is heavily focused on consumer and industrial companies. Furthermore, the fund allocates just 30% of its assets to its top ten holdings suggesting that no single company dominates the risk/return profile of the fund. Unfortunately, like many small cap products, it tends to lose more than its large cap counterpart in times of weakness and such was the case this year; BRF has lost 28.3% in 2011, slightly more than its large cap focused counterpart, EWZ (read ETFs vs. Mutual Funds).

iShares MSCI Brazil Small Cap Index Fund (EWZS - ETF report)

For another way to play the small cap Brazilian market, some investors have decided to take a closer look at this iShares fund instead. EWZS tracks the MSCI Brazil Small Cap Index which looks to give investors exposure to a basket of small cap Brazilian stocks across a variety of industries. Much like BRF, this fund has a heavy focus on industrials and consumer discretionary firms, although financials do make up close to 22% of total assets as well. The fund has outperformed BRF over the past 52 weeks by a pretty wide margin but unfortunately it can’t compete on some other metrics. EWZS is both more expensive and less liquid than BRF so traders could see higher overall costs by choosing this fund. Nevertheless, if the recent outperformance can continue, these higher costs could be more than made up for by the relatively better return that the iShares fund has demonstrated so far this year.

 

Criteria

BRF

EWZS

Expenses

0.59%

0.65%

Number of holdings

73

82

Assets in top ten

30.2%

30.5%

One year performance

-28.3%

-23.9%

Avg volume

259,000

24,000

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