International Getaways for your Capital
Even though Vermont hasn’t fully warmed up yet, summer is surely here. And to many, summer means vacation. I know several of you are probably thinking about vacations in exotic locales; Tahiti, Maui, Rio. While you’re busy “internationalizing” your summer, I urge you to consider “internationalizing” your portfolio as well.
Subscribers to Small Cap Investor Pro have seen just how effective small-cap stocks can be increasing the returns of a portfolio. But diversity according to market capitalization isn’t all you should be aiming for - international diversification is important as well.
With the euro in shambles and the UK facing serious inflation, some of you are probably wondering why even look abroad. That kind of isolationist investing approach is likely to miss out on serious gains in the world’s fastest growing economies.
Today I'm going to discuss two country specific small-cap exchange traded funds (ETF). I see these ETFs as a great way for retail investors to gain exposure to emerging economies that don't have many individual stocks trading on U.S. exchanges.
***First, let’s talk Brazil. You can’t spell BRIC without including the South American giant. Brazil is slated to host both the 2016 Summer Olympics and the 2014 World Cup soccer tournament. That means major infrastructure projects, tourism dollars, and foreign investment. The World Bank lists Brazil as one of the fastest growing emerging economies in the world, and the country just raised its 2010 GDP growth forecast from 5.0% to an impressive 6.5%. It’s without a doubt a nation on the rise.
March 2010 marked the one year anniversary of Market Vectors Brazil Small-Cap ETF (NYSE: BRF) - a fund that I think is one of the best ways for independent small-cap investors to gain exposure to Brazil's high growth economy.
Around 30% of this fund’s weight is in industrials, materials and utilities; three sectors that will see increased business as the nation readies for the Olympics and World Cup.
This one year old ETF has done well. In the past twelve months BRF has surged 55%. That performance handily trounces large-cap Brazilian stocks as measured by the iShares MSCI Brazil Index (NYSE: EWZ). As you can see in the chart below, over the past twelve months, the BRF has outperformed the EWZ by 39% - yet another reminder of the profit potential in small-cap stocks.
BRF carries a total expense ratio of 0.71%. If you want to skip the ETF and just buy a few of its component Brazilian small-caps, you can pick up shares of Cosan (NYSE: CZZ) - a company fueling Brazil’s ethanol economy. The fund also holds a great Brazilian small-cap involved in the construction industry. For a full review of this company check out Top Stock Insights, my advisory service dedicated to finding value in stocks across all market capitalizations.
***The second country-specific small cap ETF I like covers a state-capitalist Asian nation with a reputation for cheap labor and a history stretching back 5,000 years. That's right, I’m talking about Vietnam.
The Southeast Asian powerhouse has spent its history in the shadow of China, and now it is poised to benefit from China’s success - and emerge as a global leader in manufacturing.
As the population of migrant workers in China dwindles, laborers are striking at factories. Workers are now able to command significantly higher wages. Mix in strikes with Beijing’s new minimum wage rules, and China appears to be losing its place as the world’s factory. But China’s loss is Vietnam's gain, and represents an immense opportunity for those who invest in Vietnam right now.
Japanese companies like Canon Inc. and Sanyo Electric have already jumped on the bandwagon, and are shifting operations from China to Vietnam.
Vietnam is currently looking at 6.5% real GDP growth, the highest in Southeast Asia. The government is expected to devalue their already weak currency, the Dong. As Chinese exporters can tell you, a weak currency is great for domestic producers.
***Unfortunately, few Vietnamese companies are listed on U.S. exchanges, but the Market Vectors Vietnam Index (NYSE: VNM) represents a good way to get exposure to the Southeast Asian state. Though VNM isn’t the pure-play small-cap ETF that BRF is, it still affords good exposure to the Vietnamese market. VNM has 70% of its holdings listed in Vietnam, and over 40% of included firms are small-caps. Like any ETF, it carries an expense ratio, this one of 0.76%
About 85% of this fund is in financials, energy and industrials; three sectors that are going to benefit as more and more companies move their manufacturing operations to Vietnam
To give you a clearer picture of how this fund looks, here are the top five holdings and their respective sectors:
|
Holding |
Percentage of Net Assets |
|
Baoviet
Holdings BVH VN (Insurer) |
9.85% |
|
HAGL JSC
HAG VN (Raw Materials and Manufacturing) |
7.33% |
|
Oil &
Natural Gas Corp Ltd ONGC IN (Oil and Natural Gas) |
5.09% |
|
Viet Nam Construction and Import-Export
VCG VN (Construction) |
4.88% |
|
Kinh Bac
City Development Share Holding Corp KBC VN (Developer) |
4.86% |
VNM has had shaky YTD performance, dropping 7.5% since January 4 as investors have fled riskier assets. The fund is now just below its 50 day moving average and is one you should keep your eye on for a turnaround from the downward trend. In fact, the ETF recently bounced off $23.00, an area of strong support. The macroeconomic trends are strongly in Vietnam’s favor, and those should be reflected in VNM’s share price in the near future.
***Just to put these two ETFs in perspective, I’ve compared them to the Dow Jones Industrial Index, a good benchmark for a country's economic activity. With such heavy exposure to industrials and raw materials, it’s a better 'apples to apples' comparison for these two small cap ETF's than the Russell 2000.
Over the past 200 days, the Brazilian small-cap BRF has handily outperformed the Dow Jones Industrial Average, while the Vietnam ETF has underperformed the Dow by roughly 10 percent. Compared to the U.S., these countries’ growth rates are set to take off, and I believe these ETFs could as well.
***I’m always looking abroad for new opportunities, and the growth in these two countries grabbed my attention. They both are experiencing terrific economic activity and should benefit from positive global trends in the coming years. They have also both pulled back recently, and could be poised to make a run if investors' risk appetite returns.
ETFs aren’t always the perfect investment for small-cap investors looking for huge gains. But they give us international diversification in small caps that we can’t otherwise get. These two options offer excitement and better growth prospects than we’re likely to find here at home. Plus, they provide a little summer vacation for your investing capital.
