Deconstructing BRIC ETFs

Joanne Young looks at the divergent opportunities within the BRIC consortium and the prospects for economies underlying these ETFs

The four BRIC economies were grouped together in 2001 by Jim O’Neill, then head of global economic research, now chairman at Goldman Sachs Asset Management. The influence of his classification has been widespread, shaping both politics and investment strategy. 

Over the past decade, Brazil, Russia, India and China have collectively contributed over a third of world GDP growth, according to the Goldman Sachs Commodities and Strategy Research team. China overtook Japan as the world’s second largest economy in February this year, calling into question whether it can still be called an “emerging” market.

iShares EMEA head of sales David Gardner says: “That acronym has built on itself.  Investor interest developed around the phrase BRIC and when we saw that demand we started looking at assembling a product that would respond to it.”

Since iShares launched its FTSE BRIC 50 ETF in 2007, the fund has gathered assets of nearly $1.2trn. Gardner says it continues to be one of the company’s top products in terms of net new interest. This is not surprising given it has generated returns of 26.62% since its launch and around 13% over the past year.  

Strong 2010 returns
BRIC ETFs benefited throughout 2010 from consistently strong flows across emerging markets, which pulled in over $42m in net new assets according to BlackRock’s year-end figures. 

Starting in November last year though, investors have been redirecting funds towards developed markets, a trend that crystallised in the new year with emerging market ETFs seeing outflows of $3.1bn in January. 

According to Alex Tarver, product specialist in global emerging market (GEM) equity at HSBC, this reorganisation stems from a confluence of inflation concerns across emerging markets and slightly diminishing worries in developed markets. 

Over the three months to the end of February, only Russia ETFs generated positive returns, while China and Brazil funds came in negative and India funds fell sharply. Lyxor’s ETF Russia has posted returns of 22.41% over that period, while its ETF MSCI India dropped 15.67%, a differential of 3,808 basis points. 

This variation is coming at a time when investors are starting to become more specific about the actual emerging country they would like to own, according to Gardner at iShares. “What we are seeing is almost a deconstruction of the broad emerging market index into a more specific set of opportunities.”

Flows into individual emerging country ETFs have remained strongly positive so far this year, pulling in $1.5bn through January and February, during a period in which broad basket funds lost over $10bn, according to BlackRock. This may suggest an element of rotation into more specific strategies. 

Brazil ETFs have been the greatest beneficiaries of this trend, with inflows of $1.2bn in January alone, while Russia funds have gathered over $1bn this year, following on from net new assets approaching $2bn in 2010.