An ETF For Brazil’s Great Building Bonanza
December 23, 2011
In the next five years, Brazil will be hosting two of the largest sporting events in the world, which means investors have the opportunity of a lifetime.
In 2014, the country welcomes the men’s World Cup, soccer’s largest and most prestigious tournament, held every four years. Two years later, Brazil will host the most recognized sporting event in the world, the Summer Olympics.
Preparing a developing country such as Brazil for the millions of visitors will be a daunting task. It may be like China, and struggle to be ready in time, or it could get an early jump on it. Either way, Brazil will be spending buckets of money upgrading infrastructure.
The money needed to prepare the country for the two events and to keep up with normal population growth is close to $1 trillion in the next five years, according to a Reuters report released in March 2010. The majority of the $1 trillion will come from the government, with another $34 billion from private business.
The $1 trillion will make its way into the hands of local and international companies involved in a variety of industries. What follows is how investors can ensure they get a piece of the action.
Brazil Infrastructure ETF: The Trillion-Dollar Bet
An obvious choice is the EG Shares Brazil Infrastructure ETF (NYSEArca: BRXX), a niche ETF that can offer investors exposure to a basket of 30 stocks involved in the $1 trillion infrastructure build-out taking place in Brazil.
The ETF is made up of stocks that are in a variety of sectors, including utilities, metals & mining, telecommunications and transportation.
The ETF has an annual expense ratio of 0.85 percent, and currently has a dividend yield of 4.67 percent. Due to the nature of the niche stocks that make up the ETF, the higher than average expense ratio is acceptable.
Fundamentally, the ETF trades with a trailing P/E ratio of 9.8, undervalued in comparison with where the S&P 500 is and based on the growth potential of the Brazilian market.
Technically, the ETF has held up much better than the broad Brazilian market in 2011, losing 15 percent compared with a drop of 26 percent for the iShares MSCI Brazil ETF (NYSEArca: EWZ). Going back to the ETF's inception on March 2, 2010, it is down a modest 1 percent versus a drop of 19 percent for EWZ.
BRXX Is Unique
Even though BRXX is a niche international ETF, it also offers diversity due to its exposure to a variety of noncorrelated sectors.
For example, the utility sector and the metals stocks have a low correlation. This unique combination of sectors and stocks make BRXX a one-of-a-kind ETF for investors who want to gain growth potential without loading up on one niche sector.
Many wouldn’t consider telecom to be a play on infrastructure; however, consider the Internet.
Brazil’s president has authorized massive investment into upgrading the country’s mobile Internet access. The goal is to reach at least 40 million households. The Internet is not just email; it can open up opportunities for education, shopping, public services and, ultimately, the economy.
By investing in BRXX, an investor is directly tied to the money that will be spent on prepping the country for these two major sporting events.
The bonus is that regardless of the events, Brazil is still a growth story with an economy that’s expected to grow by 4 to 5 percent in 2012.
Combine growth, a very real trillion-dollar story and value, and it all points to an ETF like BRXX that's tailor-made for investors to profit from it all.
Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.