ETF Expert

Investing in resource-rich countries helped you make out like a bandit in the "21st Century Commodities Boom." Then came the bust (circa July 2008) that sent energy and material-heavy emerging market ETFs into a death spiral.

Yet once the world seemed to stabilize, the investment community went right back to the developing market growth story; that is, emerging regions with lots of "stuff" get lots of money through the export of raw materials or manufactured goods.

This is why the iShares MSCI Brazil Fund (EWZ) finds itself up 38% in 2009; meanwhile, western European countries, Japan and the U.S all struggle near the flat line.

It follows that many investors have been betting the farm on a singular theme: Invest in countries that have oil or metals or other raw materials… because the global demand is greater than the supply. And while the simple premise happens to be a pretty good bet at this stage of the world economic cycle, wouldn't it be smarter to diversify across several themes?

For example, we tend to forget that countries like China and Brazil aren't merely producing "things" for the American consumer. The Chinese middle class has become a powerful force all its own… with a unique ability to purchase homes, cars, computers and McDonalds hamburgers. Similarly, rising incomes for the Brazilian consumer has meant a surge in the desire for furniture, cell phones and designer clothing.

Still, the iShares MSCI Brazil Fund (EWZ) is primarily an investment in energy and materials on the global stage. You can see just how heavy the correlation is by comparing EWZ with the iShares Global Materials Fund (MXI). So how, then, can you diversify your stock portfolio away from the singular resources theme and, additionally, tap the potential growth of consumerism in the Brazilian economy?

Enter the Market Vectors Brazil Small Cap Fund (BRF).  Not only is BRF the the first Brazilian small-cap ETF available on a U.S. stock exchange, but you're getting increased exposure to local opportunities in Brazil's homebuilding and consumer goods segments.

Nearly 1/3 of the Brazil Small Cap Fund (BRF) is devoted to the consumer discretionary sector with another 10% in consumer staples. Without question, a 40% dedication to smaller companies that sell food products, household durables and specialty retail items is a fairly significant allocation to the increasing purchasing power of the Brazilian consumer.

The gross expense ratio of the fund is more than 1%, so it's not genuinely cheap to own. And fundamentally, a P/E of 17 isn't a screaming bargain. Still, the index of 52 companies that the Market Vectors Brazil Small Cap Fund (BRF) tracks has a dividend yield close to 4%.

Conceptually, I like what this fund offers. The average market cap of the iShares MSCI Brazil Fund (EWZ) approaches $30 billion, while the average market cap of the Market Vectors Brazil Small Cap Fund (BRF) is $1.4 billion. So the fund is providing diversification across company size (i.e., small, medium, large) as well as diversification away from the commodity play.

Since BRF is brand new as of 5/14/09, it's very difficult to tell whether it'll catch on. The Claymore China Small Cap Fund (HAO) wasn't exactly a barn-burner when it first arrived on the scene in January, 2008. Then again, small cap diversification in China may be gaining fans, as HAO has been twice the performer of its big brother, the iShares FTSE/Xinhuan China 25 Index Fund (FXI).

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.