Eyeing Brazilian Small Caps

Brazil’s hosting of the recent World Cup seemingly put all eyes on the Portuguese-speaking South American nation in May and June. My colleague Nicholas Vardy wrote a column on investing in Brazil, perpetually regarded as “the country of the future,” and I myself penned an ETF Talk on iShares MSCI Brazil Capped (EWZ), an exchange-traded fund (ETF) that tracks the Brazilian economy.

Once the soccer tournament ended, all that attention vanished rapidly. However, with EWZ rising in the month and a half since I covered it, I thought it would be fruitful to once again focus on Brazil. But this time, we will feature a smaller component of the country’s stock market: small caps.

Market Vectors Brazil Small-Cap ETF (BRF) is a non-diversified fund that follows the performance of an index which tracks Brazilian small-capitalization companies. For the purposes of the index, a company is considered Brazilian if it is incorporated in that country or generates at least half of its revenues in Brazil. BRF has gained 1.69% this year, though it recently has recovered from a major decline. This fund offers a dividend yield of 1.78%.

BRF has holdings in a wide variety of sectors, chiefly in consumer cyclical, 28.37%, with smaller weightings in utilities, 14.92%; real estate, 14.35%; consumer defensive, 14.21%; and industrials, 10.25%, among others. This ETF’s top 10 holdings make up only 27.97% of its total assets. The top five of these companies are CIA Hering SA, 3.41%; SUL America –UNT N2, 3.16%; Odontoprev SA, 2.99%; CIA Saneamento De Minas Gerais-COPASA MG, 2.87%; and Fii Btg Pactual Corp Office, 2.85%.

iShares, the ETF provider that offers EWZ, also features a Brazilian small-cap fund: iShares MSCI Brazil Small-Cap (EWZS). EWZS seeks investment results that match those of a free float-adjusted market capitalization index designed to measure the performance of Brazilian equity securities in the bottom 14% of Brazil’s market, as measured by market capitalization. This ETF has lost 0.20% this year. However, just like BRF, EWZS has been recovering from a large drop. EWZS features a dividend yield of 1.87%.

EWZS has the same broad sector investment as BRF, with roughly similar weightings: consumer cyclical, 27.16%; real estate, 17.77%; consumer defensive, 14.46%; industrials, 14.41%; and utilities, 11.91%, among others. The fund’s top 10 holdings represent 29.48% of its total assets; the top five of these companies are Equatorial –ON NM, 5.09%; CIA Hering SA, 4.21%; MRV –ON NM, 3.12%; MILLS –ON NM, 2.74%; and Sao Martinho SA, 2.64%.

I hope these two funds from the small-cap segment of Brazil’s economy give you a new perspective of that country. As seen in the charts here, Brazilian small-cap funds are gaining ground after a relatively recent tumble. EWZ, representing the whole Brazilian market, is also on the rise, meaning that now may be a good time for you to consider investing in companies that are based in the host nation of the latest World Cup.

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