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Chalking Up Another BRIC

Summary It’s almost 15 years since Goldman Sachs coined the term “BRICs” for Brazil, Russia, India and China. Progress for the countries has been hit and miss, but it’s important to remember that we’re still less than 20% into the 21st century. Despite experiencing significant turbulence, these markets are still massive, representing 20% of the world economy. With Brazil and Russia seemingly bottoming out, there may never be a better time to get back onto the BRICs bandwagon. It’s almost 15 years since Goldman Sachs’ then chief economist, Jim O’Neill, coined the term ‘BRIC.’ The idea was that four countries (Brazil, Russia, India and China) were going to be the growth drivers for the 20th century. The idea was catchy, convincing and caught on. Soon, there were more acronyms and groups of countries doing the rounds: MINT and Next 11 were two that spring to mind, but probably none were as notorious as the BRICs. As of 2015, the BRICs aren’t nearly as popular with future gazers as they once were. True, China did experience several years of double-digit growth after the acronym was invented but you didn’t need an economist to tell you that would happen. Russia, India and Brazil have fluctuated between star performers and dunces of the class: in short, typical emerging market economies. All in all, a pass mark for the BRIC prediction but better predictions have been made. But as faddish as the term BRIC was in the middle of the last decade, it’s equally faddish now to write them off entirely. True, there hasn’t been much good news emanating from any of the BRIC countries for the past year or two but we’re not even 20% through the 21st century. Many of the fundamentals that Jim O’Neill attributed to the countries are still in place, meaning there are still opportunities for investors who are willing to ride out the inevitable storms. Furthermore, even if they’re out of vogue, the BRIC countries have a combined GDP of about 20% of the world economy. And close to a third of the world’s population. So, keeping an eye on their progress is not only of interest – it’s of importance . The iShares MSCI BRIC ETF (NYSEARCA: BKF ), which has understandably been a poor performer for the past five years. Given how the BRIC acronym has fallen from grace, there’s every chance the ETF will be removed from the Blackrock portfolio entirely over the next few years, so it may be better to watch the ETFs offered for each individual country when investing in this group is concerned. iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) The Brazil ETF is trading at around half the level it was five years ago, and with Brazil facing into an economic abyss, it’s difficult to see this ETF recovering value anytime soon. The Brazilian real has been the biggest faller of any currency in the world in 2015, although it has stabilized in the past month and even made a minor recovery. It’s going to be a tough year or two for Brazil but markets have priced most of it in already. The component companies of this particular ETF are both well diversified (Brazil Foods, AmBev (NYSE: ABEV ), Bradesco Banking corporation (NYSE: BBD ), Vale mining (NYSE: VALE )) and not entirely dependent on the fate of the Brazilian economy. If (and it’s an ‘if’ not a ‘when’) President Rouseff finally deals with structural issues in the Brazilian economy, this ETF will almost certainly experience a bounce. iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) When Winston Churchill famously called the future of Russia ‘a riddle, wrapped in a mystery, inside an enigma,’ he may have been understating it. Sanctions against Russia in the past two years have inevitably led to a fall in its ETF, but possibly not by as much as one might expect. Vladimir Putin’s meetings with Obama in the past month that a defrosting of relations can’t be too far off – and with it, removal of sanctions, a jump in Russia’s economy and a boon to its stock market, the RTS. The Russia ETF is inevitably heavy on energy (Gazprom ( OTCPK:OGZPY ), Transneft, Tatneft ( OTCPK:OAOFY )), but also has some of the largest food retailers in Europe in its composition (Magnit). There’s one thing you can certainly say about Russia (which also goes for the other countries on this list), which should apply to its ETF: The country has weathered so many economic crises that it can surely ride out another one and come back stronger in the future. iShares MSCI India Index ETF (BATS: INDA ) And the star performer of the BRICs group is… India. Unlike the first two ETFs in this group, India isn’t going through a particularly dire economic period. Its growth is still hovering at around 4% – highly respectable in global terms. Just this week, CNBC released an article under the heading, “Why India is turning into everyone’s favorite EM.” Therein, it referred to India as “the world’s new growth engine.” Basically, what Jim O’Neill at Goldman Sachs predicted all those years ago. This ETF is trading at around 14,000, about 40% over what it was trading for three years ago. There are several familiar names in its composition, including some tech firms (Infosys (NYSE: INFY ), Tata (NYSE: TTM )), pharmaceuticals (Sun Pharmaceutical ( OTC:SMPQY )) and consumer staples (Hindustan Unilever ( OTC:HNSQY )). Industrial production in India is on an uptick, and many of these component companies will be the beneficiaries. iShares China Large-Cap ETF (NYSEARCA: FXI ) It’s hard not to detect an element of schadenfreude in the U.S. Press about China’s short-term economic demise. It would be unwise of anyone to think it’s going to be anything but short-term, though. Having dropped off a cliff at the beginning of 2015, falling by around 33% in just a few short months, the China Large-Cap ETF has already begun to rebound on the back of the Chinese Government’s aggressive economic policy. Other good news comes for China’s economy in the form that the Yuan has overtaken Japan’s yen as a unit of exchange. The China-Large Cap ETF gives investors exposure to 50 of the largest Chinese companies, and if you don’t know their names now, you soon will. There are large financials (Bank of China ( OTCPK:BACHY ), ICBC ( OTCPK:IDCBY ) and China Life Insurance (NYSE: LFC )), technology and telecommunications firms (Tencent Holdings ( OTCPK:TCEHY ) and China Mobile (NYSE: CHL )) and some energy giants (PetroChina (NYSE: PTR ) and CNOOC (NYSE: CEO )). A position on this ETF is a position on China’s future – and nearly fifteen years on from Jim O’Neill’s coining of the term BRICs, China is still the one you should invest in. With prices down 33% on last year, now is not a bad time to get involved. Conclusion Long after popular acronyms fade away, fundamentals remain. Anyone who thought investing in four of the world’s largest emerging markets and wouldn’t get a bumpy ride was fooling themselves. The BRICs provide enough evidence of that. However, with 20% of the world economy and over 30% of the world’s population, the BRICs still represent an excellent choice for anyone who wants to take a position on the long-term. There’s a maxim here which applies almost perfectly right now: Be careful when others are greedy and greedy when others are careful. In 2015 where the BRICs are concerned, too many are being careful. It may be your opportunity to be greedy.

Hedge Your Emerging Market Exposure With This Low-Volatility ETF

Well diversified portfolios should have an allocation to emerging market equities even when they are not favorable. There are many ways to get exposure to emerging market equities including both active and passive funds. A low volatility emerging market ETF provides exposure to the asset class with less volatility than a traditional investment. If you’re one of those investors that time your entry into certain asset classes or positions and take big positions when you do so, good luck to you. If you’ve been successful using this strategy then congratulations, you should probably start your own hedge fund and make an additional 2% and 20% of profits from other people’s money. If you’re like the rest of us however, the better strategy is to be diversified across all asset classes, all the time, and increase or decrease allocations to each based on the outlook for each asset class relative to others. One asset class that is not getting much love these days, and for good reason, is emerging market equities. According to the MSCI Emerging Market Index, these markets include China, Korea, Taiwan, Brazil, Mexico, Russia, and India, to name a few. (Note: Korea is not included in all emerging market indexes and may also be included in several developed market indexes). According to the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) , emerging markets are down almost 17% over the last year. That would have been a painful decline in your portfolio if not well diversified with, say, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) , which had a 2.7% return over the same period. While I have been telling clients to lighten up on emerging markets, by no means did that mean to sell all their positions. In fact, we might soon be getting to the inflection point where emerging markets become a good buying opportunity. Maybe we are already there. There are many experts, economists, analysts, and pundits that would argue that it is still too soon to buy EM. To which I say, you should already have some EM, even if it’s a small allocation. If emerging markets scare you but you might kick yourself if you miss the upside that usually happens too quickly to react, I have a solution. Instead of investing in emerging markets through EEM, why not invest in the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ). It has a beta to the S&P 500 of 0.3 and a standard deviation of 10% over the last 3 years. Compared to EEM, with a beta of 0.6 and a standard deviation of 12.5%, this is one way to get some exposure and not lose any sleep at night. Over the last year, EEMV is down 13.2%, compared to EEM which was down 16.6%. (click to enlarge) Doesn’t seem like much of a difference and EEMV will tend to lag in a rapidly rising market, but for a conservative investor that doesn’t like volatility, it’s a great option. Over the long-run, low volatility strategies tend to do well relative to the comparable traditional strategy. After all, if you’re down 20%, you need a 25% return to breakeven, but if you’re only down 10%, your breakeven return is only 11%. Since EEMV was launched, it has outperformed EEM by over 15%, because it loses less when the markets decline. (click to enlarge) The difference between EEMV and EEM is quite simple: the volatility of each stock is evaluated along with the correlations between stocks. And then a number of constraints are applied to ensure adequate diversification and representation of the broad market while minimizing volatility. The underlying portfolios have slightly different allocations by country, sector, and top holdings, but both provide well diversified exposure to the broad market. EEMV is a much smaller fund with only $2.7 billion compared to the much larger EEM with $27 billion, but $2.7 billion is a good size fund and it hasn’t been around for very long. I anticipate that as emerging market equity volatility increases, more flows will be directed to EEMV instead of EEM. Bottom line here is that every portfolio should be well diversified including an allocation to emerging market equities, even when the consensus view is that it is still too soon. Stay underweight, stay defensive, and consider using the minimum volatility alternative. Source: iShares.com, PM101, Yahoo