Investors Show Enthusiasm for Brazil's ETF

The Brazil ETF, which gives investors access to a basket of the country's stocks, is heavily weighted toward energy, commodities and agriculture. Top holdings include oil giant Petrobras Energia Participaciones (PZE) and mining colossus Companhia Vale do Rio Doce (RIO), both of which also trade on the New York Stock Exchange using American depositary receipts.

A host of contributing factors fired up interest in Brazil. The Bovespa Index of the Sao Paulo Stock Exchange closed up 2.4% Tuesday after the national currency benefited from word that Warren Buffett would ease world credit market anxieties by having his Berkshire Hathaway (BRK.A) cover $800 billion in municipal bonds. Investors also pushed up Vale after news that its $76 billion takeover bid for Anglo-Swiss miner Xstrata had been rejected.

Banco Itau Holding Financeira, the fund's fifth-largest holding, saw its shares jump 4.2% in Sao Paulo after it said fourth-quarter profits rose 58.6%.

American investors also might have noticed that the influential Harvard Management Co., which runs the university's $35 billion endowment, on Tuesday filed documents with the Securities and Exchange Commission listing the iShares Brazil fund as its second-largest ETF holding. It held $326 million worth of shares as of Dec. 31.

IShares Brazil is up 66% in the last 52 weeks.

Emerging-market and country-specific funds are particularly prone to that kind of correlated effect, says Tom Lydon, president of Global Trends Investments, a Newport Beach, Calif., advisory firm.

"Just in the past 24 hours there have been multiple things going on in Brazil," he says. "Goldman Sachs gave the Brazilian banks an Attractive rating, and Brazilian inflation numbers were released today; they were lower than expected, so that was positive."

And in the case of Brazil, it's sustained good news, which is an important consideration in buying foreign-focused ETFs, says David Riedel, president of the Riedel Research Group, a global equity research firm.

"A lot of times when investors choose to use ETFs as the way to get access to a country or market, that can drive the valuations of the underlying stocks out of whack, but in this case they've kept pace," he says. "Petrobras had a huge oil-field find, and [Companhia Vale do Rio Doce] has had tremendous upswings in iron ore and coal prices."

News that Brazilian agricultural producers will boost production in 2008 and that industrial output for 2007 totaled a better-than-expected 6% helped round out the overall strength of its growth story, says Lydon.

If, as expected, Brazil's sovereign debt rating is boosted to investment grade in 2008, it will make borrowing an easier proposition, and facilitate broader domestic growth as well as help its exports.

"It will be of tremendous importance to their position as a major market in the world, and it also means that among emerging markets, Brazil is one that's better positioned for upside," Riedel says.