Tag Archives: bik

Summary BRIC ETFs have been around since 2006. Although returns tend to differ due to varying country weightings, risk profiles of BRIC ETFs are almost identical. There appear to be more efficient instruments to gain exposure to emerging markets rather than BRIC funds. The BRIC acronym has become a staple in the investment community. It was coined back in 2001 by Jim O’Neill from Goldman Sachs and refers to four countries: Brazil, Russia, India and China. These states are at the forefront of emerging markets although every single one of them has been going through its own struggles. Five years after the term BRIC came to existence, the first ETF targeting specifically this group of countries was launched. There are currently 3 main ETFs in this space and I would like to review and compare their risk characteristics and potential fit into investor’s portfolio. The largest BRIC ETF is the iShares MSCI BRIC ETF (NYSEARCA: BKF ), which was launched in 2007 and has over $200m in assets under management (‘AUM’). Its expense ratio stands at 0.68%. The second one by size is the Guggenheim BRIC ETF (NYSEARCA: EEB ) with $85m of AUM. EEB was the first BRIC ETF, launched in 2006, and comes with a net expense ratio of 0.64%. Despite its lowest expense ratio of 0.49%, the SPDR S&P BRIC 40 (NYSEARCA: BIK ) trails its competitors in terms of AUM with $82m. This fund came to existence in 2007. I would like to split the analysis into two parts: returns and risk. Returns Although all three ETFs posted negative substantially negative returns over the recent 5 year period, the extent of the decline was different. Whilst BIK declined 14.8% with 33.9% drawdown, EEB posted a whooping loss of 35.2% with 46.5% maximum drawdown. BKF stood somewhere in the middle with a 26.6% loss and 38.6% drawdown. This discrepancy between BRIC ETFs performance is easy to explain as each fund has distinctly different country weightings: Weightings as of October 9, 2015 Looking at single country ETFs in the same period, it is obvious that any fund that overweighed Brazil or Russia would have suffered most: This is exactly what happened in the case of EEB, which had by far the largest share of AUM invested in these two countries. Meanwhile, BIK was the least diversified in terms of country exposure but its focus on China delivered superior returns. It is important to note that the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) appreciated 61.5% in the same period, thus the performance of BRIC ETFs can be called dismal. However, one positive takeaway is that diversification across different regions appears to be working even when global stock markets are so closely linked together. Risk Even though the three BRIC ETFs were on different return trajectories, all of them had a strikingly similar risk profile. For the purpose of this analysis, I have used a simple online tool InvestSpy . Utilizing 5 years of historical data, the results are as follows: (click to enlarge) The two columns I would like to draw reader’s attention to are ‘Annualized Volatility’ and ‘Beta’. It is rather surprising to see that all three ETFs had almost identical volatilities and beta coefficients vs. SPY. Furthermore, they all had pretty much identical correlation to SPY: This illustrates that from the overall portfolio risk perspective, all three ETFs would have had the same impact to an average portfolio in terms of risk contribution, i.e. none of them was more or less risky. Alternatives Finally, given fairly high expense ratios for BRIC ETFs, I would like to explore potential alternatives. Utilizing the correlation tool on InvestSpy , it appears that there are 3 ETFs that have a correlation coefficient of at least 0.95 with BRICs: The Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), the Schwab Emerging Markets Equity ETF (NYSEARCA: SCHE ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ). Considering the fact that, for example, VWO is much more liquid, more widely diversified and significantly cheaper, it hard to make the case for investing in any of the BRIC ETFs.