Break the Etf Bric

Chartwell Law Firm - Break the Etf Bric

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During the past year, investor interest in the so-called Bric countries: Brazil, Russia India and China has skyrocketed with a commensurate rise in respective share prices.

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Is it too late to jump on the bandwagon? What is the best way to spend in these countries and what allocations should be made to each country in the Bric group?

Fund flows into Bric countries have risen sharply during 2006 and these markets have bounced back nicely from the sharp June pullback. Interestingly, China has captured about half of all the net increases in investment from global equity managers. This Bric mania has obscured three prominent basics about these markets.

The first is that these are without doubt less advanced emerging markets with commensurate volatility and risk. If you got carried away in 2006, take some money off the table - now.

Second, your strategy for investing in these markets should be long term. The whole idea is that over time these faster growing markets will translate into above mean returns but no doubt there will be lags and bumps along the way.

Third, it would be a mistake to view these four countries as just four cogs in a wheel. Each country has its own strengths and weaknesses and will probably not move together.

Russia for sure and Brazil to a lesser degree are essentially commodity plays. Russian share prices are extremely dependent on vigor prices and since all other indicators such as political freedom, manipulation of foreign investment, cronyism and shop reforms are going the wrong way, I am extremely skeptical of this market.

Brazil offers more hope but is also dependent on commodity prices since they inventory for 40% of all exports. President Lula's re-election this year may lead to more aggressive shop reforms or a pullback which would inevitably lead to the customary boom and bust cycle.

China and India are the most promising Bric options. Both markets have been red hot and China is riding a super cycle of investment which may very well increase straight through the 2008 Olympics. It is clearly in the midst of building a world-class infrastructure in urban areas but the customary risks such as its state-dominated economy, lack of any democratic reforms, and tensions in rural areas where the majority of Chinese still struggle might derail the prized "stability" so touted by the Communist leadership.

My view is that India over the long haul presents investors with the great bull shop of the 21st century. India however, also faces daunting challenges such as how to finance the modernization of its woeful infrastructure given its high debt levels and ambivalence towards foreign investment and privatization? someone else key issue is timing. Large cap Indian fellowships have had a terrifying run and seem quite high-priced at about 20 times earnings. If revenue stay strong in 2007, the shop could strengthen, but if not, expect a sharp pullback.

The best way to spend in these Bric countries is probably straight through low-cost, flexible, transparent exchange-traded funds (Etfs) and their kin - closed-end funds. Claymore introduced the first Bric Etf this fall (Eeb) which tracks liquid U.S. Exchange-listed Adrs and Gdrs. It should any way be avoided since its top ten holdings inventory for 57% of the Etf's total exposure. In addition, 49% of its holdings are in Brazil, 31% in China, 14% in India and 6% for Russia.

You would be better off to make your own Bric allocations based on your risk profile and investment objectives using country definite funds. One option is to use the China iShare (Fxi), the Brazil iShare (Ewz) and the Morgan Stanley India Fund (Iff) as proxies for these markets. Barclay's is planning an Etn that will consequent an index of the largest fellowships on the National Stock change of India but this Etf will be shop cap weighted.

I will wait to see the firm weightings but will probably still prefer (Iff) because of its nice balance with the inclusion of several well respected Indian subsidiaries of world class multinationals such as Siemens and Abb. You need to considered watch the superior that a closed-ended fund trades relative to its net asset value.

Where would I be right now in terms of a Bric allocation? About 30% for China, 20% for India, 15% for Brazil, zero for Russia and 35% in cash.

Bric investors have done very well this year. Take some of your gains and get your financial advisor a nice Christmas present. Even better, use some of the proceeds to join the Chartwell Etf Global Advisor.

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