Give Those BRICs Another Look

 | Jun 25, 2012 | 11:30 AM EDT  | Comments
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Stock quotes in this article:

BKF

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BIK

The uncertainty recently swirling in global financial markets has surely had its origins in the job reports from the U.S. and debt figures of Europe, but the stocks of China, Brazil and other developing markets are what have taken the biggest hit as a result. With investors increasingly adopting a "risk-on or risk-off" trading mentality, asset classes perceived to be the most volatile and risky have been hit hard. At the same time, stocks perceived to be relatively "safe" have performed well -- even if they have been at the center of the storm.

Despite major concerns over the labor market and dismal expectations for future growth, U.S. stocks are holding up nicely in a tumultuous environment. The same can't be said for emerging markets, even though these economies are home to robust expansion in gross domestic product, growing middle classes and relatively stable fiscal footing. That creates an opportunity for investors with the willingness to ride out the short-term ups and downs, with the goal of profiting from longer-term demographic and economic mega-trends.

With that in mind, take a look at S&P BRIC 40 ETF (BIK), which tracks equities from the BRIC bloc -- Brazil, Russia, India and China. This popular fund is linked to an index that exhibits a forward-looking price-to-earnings multiple of under 7x. Given the tremendous growth potential for the economies of Brazil, India and China over the coming decade, that is an absurdly low price.

If you think of investing as effectively purchasing GDP growth, ETFs such as BIK are at very appealing levels at the moment. These assets are expected to generate a material portion of global economic growth in the decades ahead, yet they are trading at much lower prices than their developed (read: low-growth) counterparts. For instance, by comparison, SPDR S&P 500 (SPY) trades at a forward P/E of nearly 13x -- close to double the price of BIK. With Monday morning's lower open in the U.S. indices, the BRICs will soon be sporting an even more attractive valuation.

To be fair, there are indeed risk factors at play in the BRICs. India is battling inflation pressures, while Russia is staving off political turmoil. But these problems are relatively minor speed bumps on a long road higher. The BRIC economies are expanding at rates that dwarf the economic growth being seen anywhere else in the world, and these economies should continue to increase their global importance for decades to come. In short, misguided risk aversion has battered the prices of these securities, creating a definite buy opportunity.

That said, when it comes to picking a BRIC ETF, the devil is in the details. Though the four component countries are standard, there are some significant variations in the allocations afforded to each one across various products. BIK, for example, gives a hefty 27% weighting to oil-dependent and politically unstable Russia. iShares MSCI BRIC Index Fund (BKF), on the other hand, makes Russia its smallest weighting, with less than 15% of total assets. Your outlook towards Russian stocks -- they can be a great value or an unnecessary risk -- will probably determine which of these ETFs is a better play in your own analysis.

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