It is like they read our minds. Global X, the sponsor of the new Brazil mid-cap ETF, just launched a new sector fund that concentrates exclusively on the country’s consumer space.
We have been fans of the Brazilian consumer for awhile now. BRAQ is a pure consumption play: no exporters, no commodity producers and no banks. The portfolio even avoids the cell phone companies that U.S. investors find themselves having to buy in other markets as a proxy on aggregate consumer demand.
Instead, what you have here is roughly 35% exposure to food and beverage, 25% exposure to the retail chains, 20% to personal and household goods makers, 15% to travel and the remaining 10% invested in Brazil’s media companies.
This vertical focus ensures that (as yet) BRAQ has only slight overlap with the existing mid-cap Brazil fund BRAZ. Only three companies with a total weighting of 10.5% appear in the top 10 holdings of both portfolios: retailers Pao de Acucar (CBD) and Hypermarcas (thinly traded as HYPMY), and makeup distributor Natura Cosmeticos. BRAZ focuses on utilities, banks, manufacturers and phone companies that are absent from BRAQ, making it possible for Global X to avoid cannibalizing one fund to promote the other.
Overlap with small-cap BRF, from Van Kampen, is slightly more extensive, but still, the two funds only share two top holdings in common — retailer Lojas Renner and home builder Gafisa (GFA). Although BRF does allocate about 35% of its holdings to small-cap consumer staples and discretionary stocks, the rest of the portfolio is heavy in the banks, utilities and smaller commodity plays that BRAQ avoids.
Collectively, the top 10 BRAQ holdings represent about 48% of the portfolio. While you could probably duplicate a big chunk of its performance simply by buying the six ADRs listed, scraping up a decent stake in JBSAY and HYPMY would be tough, and would also cut you off from companies like Lojas Renner and Natura that just do not trade over here.
This is an idea whose time has come. Every emerging market needs at least one of these. So far, BRAQ is too new to track its performance relative to large-cap EWZ, but we think there is definitely an opportunity here.
Brazil’s largest retailer Grupo P