BRF VanEck Brazil Small Cap ETF

Although emerging market ETF investing has become more popular as of late, some countries are having significant trouble retaining assets. Brazil, for example, was once an investor darling, attracting not only assets from being a member of the BRIC bloc, but a significant amount of dollars in its own right as well.

That is because Brazil arguably offers several advantages when compared to many of the other main emerging market nations. Geopolitical risks are pretty much non-existent in the South American sphere while the country is a major—and well diversified—commodity producer.

This is in stark contrast to the rest of the bloc, all of which have significant political issues either within their borders or just beyond their doorsteps. Meanwhile, India and China aren’t exactly commodity powerhouses while Russia can only boast—albeit impressive amounts—of natural gas and oil.

Despite these positives, sentiment has begun to change regarding Brazil. The nation has somewhat of an inflation problem although rates are in-check even with a lower benchmark rate (read The Comprehensive Guide to Brazil ETFs).

However, the move to cut the benchmark Selic rate, although it has jumpstarted the economy, has boosted fears over further credit expansion to high risk customers. Recent data suggests that consumer credit default rates are slowly rising while the amount of both consumer and commercial loans look to rise about 20% this year.

Given this, there is growing speculation over the quality of Brazil’s growth, and further questions over how long this can be maintained. Add in weakened commodity prices across the board and a bearish case for Brazil can certainly be made in the short term (see The Seven Biggest International Equity ETFs).

This is further evidenced by ETF outflows from the space as the most popular Brazil ETF, the iShares MSCI Brazil Index Fund (EWZ), has seen over $1.4 billion flow out of the fund so far this year. In fact, among country specific ETFs, this is easily the worst performance, leaving the next closest country-specific fund, Hong Kong’s EWH, in the dust by over $1 billion.

However, it should be noted that the rest of the Brazil ETF category is slightly more positive in terms of asset fund flows. Only two other funds are seeing year-to-date outflows—BRAF and BRAQ—while three are solidly in the green, including a $20 million gain for the Brazil Small Cap ETF (BRF).

Unfortunately, even these positive moves in asset flows have been reversed in the second quarter as all the major Brazil ETFs have seen outflows in this recent time period. In fact, the leader so far in Q2 for Brazil ETFs in outflows has been BRF, suggesting that some investors are giving up on all Brazil ETFs, at least in the short-term (read Brazil Small Cap ETF Showdown).

Who Is Picking Up The Slack?

Instead, some other Latin American ETFs have seen solid inflows in place of Brazil. The iShares MSCI Chile Index Fund (ECH) has added about $120 million in assets so far this year while the Global X FTSE Colombia 20 ETF (GXG) has put on about $47 million as well.

Even the iShares MSCI Mexico Index Fund (EWW) has added about $27 million so far this year including a robust $112.5 million in the second quarter alone. Seemingly, only Peru joined Brazil in terms of Latin American asset losses so far in 2012.

ETF Performance

Unsurprisingly, the performance of some of the Brazil ETFs has been lackluster in this asset losing environment. EWZ has added about 2.1% so far in this year, although some of the small cap and sector specific funds have added double digits so far in 2012.

However, EWZ is probably the best comparison to other country specific products and in this realm the Brazil ETF has been handily beaten so far this year. ECH has added 15.4% so far in 2012, while GXG has added nearly 27% as well (read Three Overlooked Emerging Market ETFs).

Clearly, part of the reason for why investors have flowed out of Brazil ETFs has been to target other nations in the region which have performed much better this year. These smaller countries haven’t had the same level of foreign investor interest nor have they experienced nearly the same level of credit booms.

Due to this, they have been able to avoid some of the excesses that are currently plaguing the Brazilian economy. Furthermore, economies like Chile and Colombia have seen better results out of their main commodities, so there has definitely been a luck component as well (see more in the Zacks ETF Center).

Either way, it looks as though in the Latin American ETF world, the move is decidedly away from Brazil and towards other economies in the region. Not only have these countries performed better so far in 2012, but they have also seen more in inflows, suggesting that their gains may be more durable, especially if more investors continue to pile into these regional economies.

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