BRIC ETFs And Missed Opportunity

Most risky asset classes have generally posted impressive three year performance figures at this point, delivering huge gains in the 36 months or so since equity markets bottomed out during the last financial crisis. Just about every equity index is well in positive territory for the latest three year stretch, thanks to improving economic fundamentals and a general return of risk appetite among investors–even if some jitters remain.

Generally speaking, emerging markets have lead the way higher over this period; these securities were among the biggest losers during the sell-offs of late 2008 and early 2009, so they had the most ground to reclaim once markets finally bottomed out and began to head higher. So it’s no surprise that BRIC ETFs have some eye-popping performance figures; the MSCI BRIC Index Fund (BKF) is up about 105% over the past three years, while EEB and BIK have generally similar results.�

Investors are unlikely to complain about a position that doubled in value over the course of three years. But a look at the composition of these ETFs and the performances between the various markets that make up the BRIC shows that the results could have been much better [see BRIC-Or-Bust ETFdb Portfolio].�

BRIC ETF Balance

The four countries that make up the BRIC bloc are generally not evenly represented in funds that tap into this region; China and Brazil tend to account for the lion’s share of assets, while India and Russia account for considerably smaller portions. Recently, BKF broke down as follows:�

• China: 38.0%
• Brazil: 28.0%
• India: 14.3%
• Russia: 14.1%

Looking at the relative performances of component countries shows that the gains captured have been far from identical; while Brazil, Russia, India, and China are all comfortably in positive territory, some have fared better than others. The table below shows the three-year performances for the most popular single country ETFs li! nked to each of these economies:�

Ticker	ETF	3-Year Gain
EWZ	MSCI Brazil Index Fund�	+120.3%
RSX	Russia ETF	+176.2%
EPI	India Earnings Fund	+113.7%
FXI	China 25 Index Fund	+65.8%�
As of 3/7/2012

Russia, which generally accounts for the smallest allocation in BRIC ETFs, turned in by far the most impressive performance. Conversely, the country that generally accounts for the largest portion of BRIC ETF portfolios (China) turned in the least impressive results. The table above obviously reflects results from individual country-specific ETFs, and not the performance of the country’s overall equity markets. But it serves to illustrate the fact that, unfortunately for many investors, BRIC ETFs made less-than-optimal bets over the last few years.�

Again, it’s hard to complain with returns in excess of 100% over a relatively short period. And it’s hard to argue with an allocation strategy that tilts towards the red hot Chinese economy and away from an energy-dependent Russia. But in this case, that strategy happened to work against investors; an overweight position in Russian stocks would have been a recipe for even greater success in BRIC ETFs.�

The lesson: when picking an ETF, the details matter. The country breakdowns across the various BRIC ETFs vary quite a bit, and these allocations will generally end up having a significant impact on the ultimate risk/return profile realized.�

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