BRIC ETF: Understanding Benefits, Risks, and History

What Is a BRIC ETF?

The BRIC concept began with a Goldman Sachs analyst identifying Brazil, Russia, India, and China as future global economic powers by 2050. The acronym BRIC stands for Brazil, Russia, India, and China, whose leaders formed a consortium meeting periodically since 2006.

The BRIC organization expanded to include South Africa, becoming BRICS, and will include six more nations in 2024: Saudi Arabia, Iran, Ethiopia, the UAE, Egypt, and Argentina.

A BRIC ETF is an exchange-traded fund (ETF) that invests primarily in securities associated with these nations. This type of ETF allow investors to invest in overseas markets, avoid high fees, and red tape. The BRIC ETFs are a passive investment that offer exposure to emerging markets.

How BRIC ETFs Work

BRIC ETFs are passively managed, meaning the investments mirror the holdings of a broad underlying index and are not at a portfolio manager’s discretion. Just like company stock, shares of BRIC ETFs trade on a stock exchange and give investors access to these economies through exposure to stock, fixed income, currency, and other markets. The securities in these markets are commonly listed on their local stock exchanges or with American and global depositary receipts (GDRs)

ETFs allow average investors to invest in overseas markets more easily, avoiding high fees, limited options, and red tape. These funds, which are listed on exchanges and traded throughout the day, mimic the performance of the broader equity market, a specific sector, or a trend by mirroring the holdings of an index—a hypothetical portfolio of securities representing a particular market or a segment of it. BRIC ETFs provide investors with diversified exposure to major emerging markets.

Assets are invested in local stocks that trade on U.S. and European exchanges. They may carry slightly higher expense ratios than funds focused on the U.S. and Europe due to the higher costs of investing directly in these foreign stock markets.

Portfolio allocation varies per fund, but all BRIC ETFs should passively invest in an underlying index. One of these is the MSCI BRIC Index, whose 917 constituents cover approximately 85% of the free float-adjusted market capitalization in each country.

In the U.S., iShares offers a BRIC ETF with $65.6 million in assets as of January 2024, established in November 2007. It is heavily weighted in financials (21.26%), consumer discretionary (19.63%), and communication (11.53%), with a total of 684 holdings.

In March 2022, iShares changed the fund name to iShares MSCI BIC ETF, excluding Russian securities due to sanctions following Ukraine's invasion.

Important Considerations for BRIC ETF Investors

A fund qualifies as a BRIC ETF even if it doesn't invest in all acronym countries. Many BRIC ETFs initially invested in all four countries, but they vanished as BRIC's market appeal declined. The BRIC concept faded as the economic performances of these nations diverged.

Pros and Cons of Investing in BRIC ETFs

Pros

Investors seeking emerging market exposure are always warned of the relatively volatile nature of these bourses and advised accordingly to spread their bets and diversify as much as possible.

ETFs generally represent the best way to get exposure to these parts of the world. They can be bought and sold instantly on an exchange, making them more liquid than mutual funds. They offer plenty of diversification in markets with higher levels of risk, which are often less understood by the average investor. Additionally, investing in a BRIC ETF is generally less expensive than investing directly in the local stock exchanges of these countries.

Cons

The term BRIC has been dismissed by many as a marketing tool. Skeptics never took to the idea of viewing the four separate countries as one and criticized asset managers for using the hype that Goldman Sachs' paper "Building Better Economic BRICs," built to piece them together as an investment solution and the best gateway to emerging markets.

Back in 2001, the four countries shared some similarities. Now, their economies and directions have diverged considerably. Since the concept was first formed, China and India have outperformed, while the other nations have underwhelmed.

Some critics pointed out that excessive marketing campaigns centered on the bumper returns offered by investing in all four of the BRIC nations failed to mention the issues of state intervention. Aside from India, investing in these countries generally meant buying stocks in companies more concerned with serving local interests than their shareholders.

The Evolution of BRIC Nations

In 2001, Jim O'Neill of Goldman Sachs labeled the BRICs as the fastest-growing market economies. The four countries were regularly talked about, despite diverging in nature and existing in different parts of the world. Together, they attracted Wall Street's interest as key destinations for high returns in emerging markets.

Traders and investors flocked to local BRIC securities. Companies and entrepreneurs were keen to bring their companies to BRIC countries to capture large markets with increasing amounts of capital and increased exposure to the consumption habits of developed nations.

After the late 2000s recession, BRICs were hot investment targets as their economies grew.

From there, their popularity began to unravel. The American economy recovered and the BRIC economies leveled off. Their startling growth of the 2000s slowed down.

BRICs' popularity waned as the U.S. economy recovered and their growth slowed. South Africa hosted the 15th BRICS summit on Aug. 24, 2023.

The Bottom Line

BRIC ETFs provide exposure to some of the largest emerging market economies, including Brazil, Russia, India, China, and most recently, South Africa. Starting in 2024, BRIC ETFs will expand to include investments from countries such as Saudi Arabia, Iran, Ethiopia, the United Arab Emirates, Egypt, and Argentina, reflecting a broadening of the BRICS consortium.

Like any other ETF, a BRIC ETF typically invests passively, mirroring a broad underlying index. These ETFs offer investors liquidity and ease of trading and provide significant opportunities for diversification.

While BRIC ETFs offer access to emerging markets, their economic performances and market dynamics can vary widely, necessitating a careful assessment by investors. Another thing for potential investors to consider is that the cost to invest in BRIC ETFs can be higher due to expenses associated with investing in foreign markets