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Get Small Cap Exposure with Brazilian Flavor Using This ETF

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Emerging markets (EM) were anything but spared by the economic effects of the coronavirus pandemic. However, there are still opportunities to be had for investors looking towards Brazil to diversify their portfolios with EM exposure in Latin America via small cap equities using the VanEck Vectors Brazil Small-Cap ETF (BRF).

While small caps were one of the hardest-hit equities during the height of the pandemic sell-offs, the tide could be turning for this group. Brazil, in particular, is seeing their small cap equities start to rebound from their lows.

“A group that is having a resurgence around the world in the midst of COVID-19 is the small-cap segment,” an S&P Global article noted. “The report shows that small-cap indices (such as Brazil’s S&P/B3 SmallCap Select Index) had a great quarter (29.1%) and stable one-year return (3.4%). Likewise, Mexico’s S&P/BMV IRT SmallCap gained 24.1% for Q2 and 0.8% for the one-year period. Chile’s S&P/CLX IGPA SmallCap hung on to its five-year return (5.6%), not a small feat given that for these comparable periods, all other indices’ were far behind it.”

BRF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Brazil Small-Cap Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index.

The index includes securities of Brazilian small-capitalization companies. A company is generally considered to be a Brazilian company if it is incorporated in Brazil or is incorporated outside of Brazil but has at least 50% of its revenues/related assets in Brazil.

BRF Chart

BRF data by YCharts

BRF provides investors with:

  • Small cap focus: Small caps may offer greater exposure to domestic growth, less exposure to global cyclicals
  • Largest Economy in Latin America: Brazil has a vibrant economy with favorable demographics; nearly 40% of the population are under the age of 25
  • Pure play: Companies must be incorporated in, or derive at least 50% of total revenues from Brazil to be added to the index

Of course, the remaining wild card will be how well the country rebounds from the effects of the pandemic. Brazil’s central bank is doing what it can in terms of monetary policy by slashing rates by 25 basis points earlier this month.

“There is little to gain from further accommodation at this level given financial stability risks, but they were slightly more dovish than expected,” said Drausio Giacomelli, head of emerging market research at Deutsche Bank in New York.

“They are acknowledging the recovery will be gradual and inflation risks are very subdued. There is no pressure for any policy normalization, and I would expect them to be on hold for a long time,” he said.

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