BRIC ETF

What Is a BRIC ETF?

A BRIC ETF is an exchange-traded fund (ETF) that invests in stocks and listed securities associated with the countries of Brazil, Russia, India, and China, otherwise known as the BRIC nations, usually through local stock exchanges or with American and global depositary receipts (GDRs). These funds are passively managed, meaning that the investments they make mirror the holdings of a broad underlying index and are not at a portfolio manager’s discretion.

Understanding BRIC ETFs

The advance of ETFs has made it possible for average investors to invest relatively easily in overseas securities without encountering big fees, limited options, and red tape. These popular funds, which are listed on exchanges and traded throughout the day just like ordinary stock, offer the possibility to mimic the performance of the broader equity market or a specific sector or trend by mirroring the holdings of a designated index — a hypothetical portfolio of securities representing a particular market or a segment of it.

BRIC ETFs are designed to give holders diversified exposure to Brazil, Russia, India, and China: four of the biggest emerging market economies. Assets are invested in both locally issued stocks and shares that trade on exchanges in the United States and Europe. The portfolio allocation among the four counties may vary from fund to fund, but all ETFs in the space should be passively invested around an underlying index, such as the MSCI BRIC Index, whose 879 constituents cover approximately 85% of the free float-adjusted market capitalization in each country.

A fund can qualify as a BRIC ETF even if it is not invested in all of the four countries that make up the acronym. At one point in time, there were many BRIC ETFs invested in all four nations. Then, as the idea of BRIC as a hot market set waned, these funds disappeared — currently, there are only two BRIC ETFs invested in securities in every one of the BRIC countries.

Important

The concept of BRIC as a singular entity has gradually faded from popular thought over the years as the economic performances of these four nations diverged.

BRIC ETFs may carry slightly higher expense ratios than funds focused on the U.S. and Europe due to the higher costs of investing directly in these foreign stock markets.

History of BRIC ETFs

BRICs shot to fame in 2001 when Jim O'Neill of Goldman Sachs collectively labeled them as the fastest-growing market economies. Suddenly, the four countries were regularly talked about in union, despite diverging in nature and belonging to different parts of the world. Combined, they became the talk of Wall Street and the principal destination for any investor seeking out the higher returns offered by emerging markets.

By 2014, BRIC countries accounted for nearly 30 percent of global gross domestic product (GDP), up from 11 percent in 1990.

Traders and investors wanted to invest in BRIC local securities, and companies and entrepreneurs were keen to bring their companies to BRIC countries to capture large markets with increasing amounts of capital and increased exposure to the consumption habits of developed nations. BRIC countries became especially hot investment targets after the great recession of the late 2000s, as their economies were still on the rise, but because of relative economies, individual securities and ETFs were still affordable to investors.

From there, their popularity began to unravel. As the American economy recovered and BRIC economies leveled off and the startling growth of the 2000s slowed down, BRIC countries individually were seen more realistically and the concept of BRIC as a singular entity faded from popular thought.

Criticism of BRIC ETFs

The term BRIC has regularly been dismissed as a marketing tool. Skeptics never took to the idea of viewing the four separate countries as one and criticized asset managers for using the hype that Goldman Sachs' paper "Building Better Economic BRICs," built to piece them together as an investment solution and the best gateway to emerging markets.

Nowadays it is common for the acronym to be described as senseless. Back in 2001, the four countries shared some similarities. Now, their fates have diverged considerably. Since the concept was first formed, China and India have outperformed, while the other nations have underwhelmed.

Some critics have also pointed out that excessive marketing campaigns centered on the bumper returns offered by investing in all four of the BRIC nations failed to mention the issues of state intervention. Aside from India, investing in these countries generally meant buying stocks in companies more concerned with serving local interests than their shareholders.

Benefits of a BRIC ETF

That’s not to say there’s nothing positive to come from investing in all four of the so-called BRICs. Investors seeking emerging market exposure are always warned of the more volatile nature of these bourses and advised accordingly to spread their bets and diversify as much as possible. Investing in four different countries certainly fits that criteria more than just betting on one of them.

ETFs also generally represent the best way to get exposure to these parts of the world. They can be bought and sold instantly on an exchange, making them more liquid than mutual funds, offer plenty of diversification in markets fraught with risk and unknown to the average investor, and work out a lot cheaper than investing directly in local stock exchanges.