Advertisement

Be Wary of These 3 BRIC ETFs on Russian Issues

The BRIC nations – Brazil, Russian, India and China – have been under pressure since last year thanks to the QE taper threat. These markets were once high fliers on the front line emerging market status and rapid growth, but gradually succumbed to a slowdown as the fear of less hot money inflows, depreciating currency, and inflation worries hit their growth profiles.

While the whole of 2013 passed by in tackling these issues, 2014 came up with a new concern – geo-political – as Russian tensions acted as another blow to investing in BRIC nations.

Russia has been at the top of all global agenda this year thanks to its annexation of Crimea – which was a Ukrainian territory before March 16. Both the U.S. and Europe have accused Russia of violating international law as well as sovereignty on this Crimea issue and have isolated Russia by imposing sanctions against the country.

As per Bloomberg reports, some analysts expect the Russian economy, which is already buckling under pressure from slowing growth, to fall into the recessionary trap at least for a few quarters. Jittery markets will indirectly punish investments and raise cost of borrowings.

Sanctions have so far come against some high officials but analysts expect stricter financial restrictions on Russia. The country’s Micex stock index has nosedived 13.1% so far this year against a 5.8% decline for the MSCI Emerging Markets Index (read: Is It Time to Flee Russian ETFs?).

Foreign investors have been withdrawing money from Russian banks too. Thanks to the unsavory Crimean win and the backlash, the Standard & Poor's ratings agency on Thursday slashed its outlook on Russia from stable to negative. The S&P attributed “material and unanticipated economic and financial consequences” from such sanctions to this reduced outlook (read: 3 Emerging Market ETFs Off to a Great Start in 2014).

Amid such a situation, investors will tend to flee the Russian space for obvious reasons. The top three Russia ETFs Market Vectors Russia ETF (RSX), iShares MSCI Russia Capped Index (ERUS) and Market Vectors Russia Small-Cap ETF (RSXJ) have taken a beating this year.

We would also like to notify investors that not only the Russian pure-plays but also some BRIC ETFs with higher Russian exposure should be wiser to dump at this stage. Below we have highlighted three BRIC ETFs in detail and discussed how exposed they are to Russian investments:

iShares MSCI BRIC Index Fund (BKF)

This iShares ETF is the highest asset gatherer in the BRIC space. It invests about $368 million of assets in 305 holdings. While China tops the geographic allocation with 43.6% of share, Russia accounts for about 12.3% holdings and secures the fourth largest position in the fund.

The portfolio’s approach is not highly concentrated as about 27% of the basket is invested in the top-10 holdings. No single stock takes up more than 5.01% of the fund. Tencent, China Mobile and China Construction are the top three holdings of the fund.

Meanwhile, from a sector look, financials accounts for 30.3% of the portfolio, while energy (18.9%) and information technology (10.6%) round out the top three. The fund charges 67 bps in fees. BKF lost about 4.26% in 2013 and is down about 6% this year.

Guggenhiem BRIC ETF (EEB)

This Guggenhiem fund comes second when you look at asset generation. The fund invests about $320.6 million of assets in 121 stocks. Brazil rules the fund with about 30.5% of allocation while Russia comes in at the second spot with about 27.65% of exposure.

More than one-third of its assets are invested in the top-10 holdings. Gazprom (6.16%), China Mobile (6.10%) and Baidu (4.84%) are the top-three holdings. In terms of sector exposure, energy takes the top spot at 30%, followed by integrated oil and gas (22.3%) and financials (18.8%). EEB charges 64 bps in fees.

The fund was down only 1.31% in 2013, but lost as much as 11.9% this year thanks to its considerable exposure in Russia (read: Emerging Global Changes Index For Beyond BRICs ETF).

SPDR S&P BRIC 40 ETF (BIK)

This $149-million ETF looks to track the S&P BRIC 40 Index. It is the cheapest choice in the BRIC space with about 50 bps in fees. Holding about 46 securities in its portfolio, the fund invests about 50% of its total assets in the top-10 holdings. This calls for substantial concentration risk.

Top holdings include Tencent (9%), China Construction Bank (6.32%), and Industrial & commercial bank of china limited (5.56%). In total, financials makes up 36% of the portfolio, followed by 25.6% for energy, and then 18% for information technology.

Here also, Russia (20.71%) takes up the second spot trailing the topper, China (53.7%). The fund is approaching a double digit loss in the year-to-date frame while it was flat last year.

Bottom Line

While we suggest investors (at the current level) stay away from the trio as all have considerable Russian assets, BKF is still a better choice for investors desperately looking for BRIC exposure.

Investors should note that, not only Russia, concerns are building up over China as well with manufacturing sector waning for the third successive month (read: China ETFs Tumble to Start 2014). Brazil has long been grappling with slowing growth and higher inflation issues, though some election talk is helping to boost this market. Thus, at present it is better to stay away from BRIC nations altogether and wait for sunnier days, though of the trio, BKF is definitely the least exposed to Russian issues.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on RSX

Read the analyst report on BKF

Read the analyst report on EEB

Read the analyst report on BIK


Zacks Investment Research



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report