BRIC ETF: What It Is, Pros and Cons, History

What Is a BRIC ETF?

The BRIC nations concept originated with a Goldman Sachs analyst who sought to identify the fast-growing economic powers that would emerge as dominant global players by the year 2050. The acronym stands for Brazil, Russia, India, and China. The leaders of those nations seized on the idea to form a consortium that has held summits from time to time since 2006.

The BRIC organization later expanded to include South Africa, and the acronym changed to BRICS. In 2024, the group will expand again to include Saudi Arabia, Iran, Ethiopia, the United Arab Emirates, Egypt, and Argentina.

A BRIC ETF is an exchange-traded fund (ETF) that invests primarily in securities associated with these nations.

Understanding BRIC ETFs

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)

The ETF market makes it possible and easier for average investors to invest in overseas markets without encountering big 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 are designed to give investors diversified exposure to the largest emerging market economies. Assets are invested in locally issued stocks and shares that trade on exchanges in the United States and Europe. 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.

The portfolio allocation among the BRIC countries varies from fund to fund, but all ETFs in the space should be passively invested around 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.

One of the choices for ETF investors in the U.S. is offered by iShares, it was established in November 2007 and has $65.6 million in assets as of January 2024. It is heavily weighted in financials (21.26%), consumer discretionary (19.63%), and communication (11.53%) with a total of 684 holdings.

An important point to note, though, is that iShares changed the name of this fund from iShares MSCI BRIC ETF to iShares MSCI BIC ETF in March 2022. Russian securities were dropped from the portfolio in response to the economic sanctions placed on the country following its invasion of Ukraine.

Special Considerations

A fund can qualify as a BRIC ETF even if it is not invested in all of the countries that make up the acronym. At one point in time, there were many BRIC ETFs invested in all four nations. Then, as the idea of BRIC as a hot market waned, these funds disappeared. In essence, the concept of BRIC as a singular entity has gradually faded from popularity over the years as the economic performances of these four nations diverged.

Advantages and Disadvantages of BRIC ETFs

Advantages

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.

Disadvantages

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.

History of BRIC Countries

BRICs shot to fame in 2001 when Jim O'Neill of Goldman Sachs collectively labeled them 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. Combined, they became the talk of Wall Street and the principal destination for any investor seeking out the higher returns offered by emerging markets.

As a result, traders and investors wanted to invest in 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.

BRIC countries became especially hot investment targets after the great recession of the late 2000s, as their economies were still on the rise.

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. BRIC countries individually were seen more realistically, and the concept of BRIC as a singular entity faded from popular thought.

South Africa hosted the 15th BRICS summit on Aug. 24, 2023.

The Bottom Line

A BRIC ETF invests in securities associated with the countries of Brazil, Russia, India, China, and South Africa. In 2024, it can be expected that the ETFs, and the indexes that drive their investments, will change with the addition of securities that represent Saudi Arabia, Iran, Ethiopia, the United Arab Emirates, Egypt, and Argentina.

The stated purpose of a BRIC ETF is to offer investors diversified exposure to these fast-growing economies. Like any other ETF, a BRIC ETF is normally passively invested and mirrors the holdings of a broad underlying index.

BRIC ETFs can be bought and sold instantly on an exchange, so they are more liquid than mutual funds. They also offer more opportunities for diversification. On the other hand, BRIC ETFs may carry a higher expense ratio due to the higher costs of investing directly in these foreign stock markets.