TheDumbMoney (56.05)

Hey, I just got a Brazilian!!! (ETF)

January 13, 2011 – Comments (7) | RELATED TICKERS: BRF , EWZ , IIF

I recently made a BRF purchase.  I posted this in my BRF pitch just now, but I'm posting it here as well:

What is it? -- BRF is an ETF that seeks to track the performance of small cap Brazilian-listed stocks that generate at least 50% either their revenues in Brazil.  I am not going to pretend to you that I know all of the companies in it, or that I understand the industries.  I don't.  That, of course, is precisely why I am buying an ETF (I bought it on the day I entered it in CAPS, a 1/4 position).

Why go to international stocks?  -- Well, while I already believe I have great international exposure via some of my large CAP stocks that, while American, generate an enormous amount of their revenue and earnings abroad, these stocks are, still (aside from PM) tied significantly to the fortunes of America.  WMT's international growth opportunities are grand, and I believe in WMT, but let's face it, for the next three years or so even 11% or more growth internationally isn't going to move the needle if things don't pick up more in the U.S.  Similar things could be said about KO and PG and other stocks, all to a lesser or greater extent. 

Why use an ETF? -- as I touched on above, I don't know the Brazilian market extremely well.  Even keeping track of the U.S. market is hard, and I have to limit myself by using pre-screens to weed out thousands upon thousands of potential picks.  Since every CAPS pick is a real life portfolio position for me, I'm not willing to go buy a bunch of foreign stocks and I'm sure I'd pick more losers than winners.  So hence an ETF.

Why do Brazil now?  -- I could have started in almost any market.  Indonesia has been particularly frothy and I think is way over-bought, and the least stable a country, so I would not start there.  China would be good, but there are so many U.S.-listed stocks in China I'm considering going with a basket of individual stocks in that country that I select.  India would be another option, but so many of the ETFs focus on names like INFY that are hugely tied to consumers in the U.S. and/or Europe, which seems to me to reduce diversification.  I also think India has major geopolitical Pakistan problems that deter me a bit.  So now I'm going with Brazil.  It's only a 1/4 position, as I ultimately see it.  Russia to me is in the early stages of trying to be China -- lower democracy, allow economic freedom, lower personal freedom, etc.  But it's still so corrupt and weak and unlike the Chinese, who are industrious and ambitious, Russians appear (with all due respect) to be early-dying drunks, by-and-large, and the declining population is a demographic red flag for anyone interested in Russian consumer investing.  Russia is not an emerging market; it is a decayed developed market trying to become emerging.  If I want to invest in Russia I'll probably buy PEP because of its Wim-Bil-Dann (sp?) purchase, give myself some exposure while limiting my downside a bit more even than with an ETF.  Brazil, by contrast, has already been turned around by de Silva (and/or by commodities demand, admitedly).  Thus I view this ETF as a play on the long-term growth of the Brazilian consumer, and with moderate but limited commodity exposure, thus hedging my otherwise incredibly bearish take on commodities based on their current pricing.

Why this Brazilian ETF? -- The other main ETF is EWZ, but it is totally dominated by large commodities producers and banks (see here: http://us.ishares.com/product_info/fund/holdings/EWZ.htm), because those are Brazil's largest companies.  Those in turn are directly driven, at least in part, by commodities speculation and/or Chinese growth, and lately the Chinese market has been severely underperforming commodities indexes, which I find interesting....   By contrast, BRF is a bit more tied to why Brazilian consumers are buying.  There is obviously a connect-through effect to these macro factors, but I think it has to be mitigated somewhat.  And by focusing on Brazilian consumers, I hope to mitigate the impact of potential foreign exchange volatility on my results.

What are the main risks?  -- Brand new President might screw up Brazil again.  This is their first peaceful transition of power since the election of De Silva, their first contemporay/modern/rational President.  Collapse in commodities prices totally takes down Brazillian economy.  Currency war or continued appreciation of Brazilian currency hammers Brazilian economy.  Large Brazilian stock index rise over the last two years may be somewhat artificial, for various reasons.  This is why I'm starting with a very small 1/4 position of what I would ultimately like to invest in Brazil.

Disclosures/Investing Notes:  My profile says it, but I own all of my picks in CAPS.  I should add that I own them in my non-savings, non-401k, non-emergency money portion of my portfolio, which is a relatively minor overall part where I try to have a little fun.  I always buy on the day I make my CAPS rating.  Subsequent purchases are described in the comments.  When I sell out a position entirely, I remove it from CAPS.  It's not quite a real porfolio because it doesn't describe my weighting, etc., but it's about as close as CAPS allows, and at least I get to sanity-check myself a bit.  So far, sanity says I have been wise to restrict the amount of money I invest on my own!

As always, due your own due diligence; I'm a rank amateur.  I'll also add the following to my original pitch:  I have felt increasing psychological pressure in the last two months to buy stocks.  And in fact, I have bought more in the past month than I did in the prior four months combined.  As part of this purchasing spree, I also bought my first penny stock, though I think it's a great company, for reasons I'll later explain.  True, in part I was investing a portion of my year-end bonus, and also completing my IRA allocation for the year, but did I have to put so much cash to work now?  No. I did not.  I find this trend very troubling, given that it coincides with, but largely follows, a major, major stock index increase, and, more importantly, a major reduction in perceived market risk....  So, I have now told myself:  no more purchases OF ANY KIND until 2/22/2010, which is about when I first started using CAPS!  Lots of 2s make it an easy date to remember.  Bullishness and complacency are running rampant, and even if one's ultimate take is bullish, I fear we HAVE to be in line for at least a major temporary pull-back as some point.  While my market predictions are just as bad as everyone else's (in 3/2010, I was pretty convinced the Dow would not break and/or stay above 11K by/at 2010 year-end), I think a break is still justified anyway given that I have quite thoroughly violated my "one-to-two equity purchases per month" rule in December and January.  I will shortly post my notes pertaining to ALIF.OB.