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You’ve likely heard about emerging markets. But have you considered BRICS ETFs? These unique exchange-traded funds offer exposure to some of the world’s fastest-growing economies: Brazil, Russia, India, China, and South Africa.
As developing economies continue to expand, BRICS ETFs have gained attention from investors looking to diversify their portfolios and tap into the growth of these dynamic markets.
BRICS ETFs offer access to various stocks from these emerging markets, providing exposure to different sectors and industries. Understanding these aspects can help you decide if BRICS ETFs are a worthwhile addition to your portfolio.
What is a BRIC ETF?
A BRICS ETF is an exchange-traded fund that gives you exposure to the largest emerging market economies in the world. These funds invest primarily in securities associated with Brazil, Russia, India, China, and South Africa.
BRICS ETFs are passively managed, which means they mirror the holdings of a broad underlying index rather than being actively managed by a portfolio manager.
Read: Do ETFs Pay Dividends?
Definition and components
BRICS ETFs are designed to provide diversified exposure to the fastest-growing economies globally. They invest in locally issued stocks and shares that trade on exchanges in the United States and Europe.
One example is the MSCI BRIC Index, which includes about 917 constituents and covers approximately 85% of the free float-adjusted market capitalization in each country.
The index was originally known as the MSCI BRIC Index, which included Russia, but in 2022, the company reclassified Russia as uninvestable, leading to its removal from the index. Therefore, the index is now called the MSCI BIC Index.
The origin and history of BRIC
The concept of BRIC nations originated in 2001 when Jim O’Neill, then-chairman of Goldman Sachs Asset Management, introduced it in a publication titled “Building Better Global Economic BRICs.” O’Neill sought to identify fast-growing economic powers that would emerge as dominant global players by 2050.
Formation of the BRIC alliance
The BRIC acronym quickly gained traction in economic, financial, business, academic, and media circles. In 2006, the concept evolved from an analytical category to a formal grouping incorporated into the foreign policies of Brazil, Russia, India, and China.
The foreign ministers of these four countries held their first meeting on the sidelines of the 61st UN General Assembly in September 2006, marking the beginning of their collective efforts.
Evolution from BRIC to BRICS
In 2010, South Africa began efforts to join the BRIC grouping. After being formally invited by China and accepted by the other BRIC countries, South Africa officially became a member on December 24, 2010.
This expansion led to the acronym changing from BRIC to BRICS, with the “S” representing South Africa.
The BRICS partnership has since grown in scope and depth. Today, these countries collaborate on various fronts, including political and security cooperation, financial and economic cooperation, and cultural and people-to-people exchanges.
Approximately 150 meetings are held annually across these three pillars of cooperation.
Expansion of BRICS
On 1 January 2024, BRICS admitted four new members: Egypt, Ethiopia, Iran, and the United Arab Emirates. A Saudi Arabian government minister said in mid-January it had not joined. However, South Africa’s government has since confirmed its membership status, saying Saudia Arabia confirmed they are joining the BRICS. The name for the expanded group has not yet been announced, but it may be “BRICS +”.
Key Characteristics
BRICS countries ( Brazil, Russia, India, China, and South Africa) represent a significant portion of the global economy and population:
- Population: They account for over 42% of the world’s population.
- Territory: BRICS nations cover about 30% of the world’s land area.
- Economic impact: These countries contribute to 23% of global GDP and 18% of global trade.
However, after the expansion of the BRICS with new members, the expanded group has a combined population of about 3.5 billion, or 45% of the world’s inhabitants, and accounts for approximately 42% of global crude oil output. Combined, members’ economies are worth more than $28.5tn – about 28% of the global economy.
The estimated GDP growth rates for 2024 vary among BRICS nations, with India leading at 6.8%, followed by Ethiopia at 6.2%, China at 4.6%, United Arab Emirates at 3.5%, Iran at 3.3%, Russia at 3.2%, Egypt at 3%, Saudia Arabia at 2.6%, Brazil at 2.2%, and South Africa at 0.9%.
By investing in a BRICS ETF, you gain exposure to these dynamic economies and their growth potential.
However, it’s important to keep in mind that while these markets offer opportunities for yields, they also come with increased risks due to factors such as political instability, currency fluctuations, and regulatory changes.
For Muslim investors, an additional consideration when investing in BRICS ETFs is the need to ensure that investments are in line with Shariah principles. This includes avoiding industries or companies that derive a significant portion of their revenue from haram activities, such as conventional banking, alcohol, and gambling.
Reviewing the underlying assets within the ETF to determine their compliance with halal investing guidelines is crucial. This ensures that your investment aligns with your financial goals and religious beliefs. You can learn more about building your personal Halal ETFs with Musaffa.
Read: Are ETFs Halal?
Advantages of BRICS ETFs
When you’re looking to expand your investment portfolio, BRIC ETFs offer several compelling advantages. These funds provide a unique opportunity to tap into the potential of some of the world’s fastest-growing economies.
1. Exposure to emerging markets
BRIC ETFs give you a convenient way to invest in important emerging markets through a single fund. These ETFs typically focus on Brazil, Russia, India, and China, but some now include additional countries like Egypt, Ethiopia, Iran, Saudi Arabia, South Africa, and the United Arab Emirates (UAE).
By investing in a BRIC ETF, you gain access to stocks and bonds from these countries without the need to navigate each market individually. This is particularly beneficial because emerging markets can be complex and challenging for the average investor to understand.
2. Diversification benefits
One of the most significant advantages of BRIC ETFs is the diversification they offer to your investment portfolio.
These ETFs provide exposure to different emerging markets across various continents. For instance:
- Brazil represents South America.
- Russia spans Eastern Europe and Northern Asia.
- India covers South Asia.
- China dominates East Asia.
- South Africa represents the African continent.
- Iran represents Western Asia (or the Middle East).
- Egypt covers North Africa and is also considered a bridge between Africa and the Middle East.
- UAE (United Arab Emirates) represents the Arabian Peninsula.
- Ethiopia dominates the Horn of Africa.
- Saudi Arabia represents the Arabian Peninsula and plays a central role in the Middle East.
This geographical spread helps to mitigate risk by ensuring that your investments aren’t concentrated in a single region or economy. If one market experiences a downturn, the others may help offset potential losses.
Another advantage is the cost-effectiveness of BRICS ETFs. Investing in these funds is generally less expensive than trying to invest directly in the local stock exchanges of these countries.
Also Read: What are the effective strategies for growing an investment portfolio?
Disadvantages of BRICS ETFs
While BRICS ETFs offer exciting opportunities, they also come with their fair share of challenges.
1. High volatility
When you invest in BRICS ETFs, you’re stepping into a world of larger price swings. These emerging markets tend to experience more significant fluctuations compared to developed markets.
This higher volatility stems from various factors, including economic uncertainty, trade disruptions, and global market dynamics.
For instance, stock markets in Brazil, Russia, India, and China can undergo sudden changes that might catch you off guard. These abrupt movements can lead to substantial short-term swings in the value of your BRICS ETF investments.
If you’re a risk-averse investor, these fluctuations might be unsettling and could impact your investment strategy.
2. Political and economic risks
The political and economic landscapes in BRICS countries can be less stable than what you might be used to in more developed economies. This instability can have a direct impact on the performance of companies within BRICS ETFs.
Consider these potential risks:
- Changes in government policies.
- Regulatory shifts.
- Political unrest.
For example, Russia has faced challenges due to armed conflicts and sanctions, while China has seen significant regulatory changes that have affected various sectors. These events can quickly alter the investment landscape and impact your yields.
Moreover, the regulatory environments in BRIC countries may not be as robust as those in developed markets. This can raise concerns about corporate governance and transparency.
As an investor, you might find it more challenging to accurately assess the risks and prospects of the companies within the ETF.
3. Currency fluctuations
When you invest in BRIC ETFs, you’re not just exposed to stock market movements, you’re also taking on currency risk.
Here’s how currency risk can impact your investment:
- If the currencies of BRICS countries weaken against your home currency (e.g., the U.S. dollar), it can negatively affect the relative performance of your holdings.
- BRICS countries have experienced periods of high inflation in the past, which can dampen currency values.
- Currency movements can either enhance or erode your investment yields, adding an extra layer of complexity to your investment.
Taking Russia as an example again, it is known for its volatility, often influenced by oil prices. Similarly, Brazil can be subject to fluctuations due to political and economic instability.
These currency movements can significantly impact the value of your BRICS ETF investments, even if the underlying stocks perform well.
It’s worth noting that there’s talk of a potential new BRICS currency, which could introduce new trading pairs and alter currency correlations. If this materializes, it would require investors to adapt their strategies accordingly.
Must Read: How to Choose the Best ETF?
Bottom Line
BRICS ETFs offer a unique way to tap into the growth potential of some of the world’s fastest-growing economies. They provide exposure to emerging markets and diversification benefits.
However, these funds also come with their fair share of challenges, including higher volatility, political and economic risks, and currency fluctuations.
When thinking about adding BRICS ETFs to your portfolio, it’s crucial to weigh the pros and cons carefully. These funds can be a valuable tool to diversify your investments but they also require a higher risk tolerance due to the volatility.
In the end, your decision should align with your financial goals and overall investment strategy. Remember, seeking advice from a financial professional can help you make an informed choice about whether BRICS ETFs are right for you.
Disclaimer: The content is for informational purposes only and does not constitute financial advice. It is important to conduct your own research or consult with a financial or investment advisor. All logos or brands are referenced for identification purposes only and do not constitute an endorsement of any kind. This information is accurate as of the date of publication and may not reflect recent changes. Access our comprehensive legal disclaimers at [LINK].
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FAQs
1. What are the main risks associated with investing in BRICS ETFs?
Investing in BRICS ETFs carries certain risks due to the political and economic instability in these countries. Changes in government policies, regulations, and political unrest can significantly impact investment outcomes in these markets.
2. Are investments in BRICS safe?
Investments in BRICS can be risky due to factors such as economic uncertainty, political instability, trade volatility, and global market dynamics.
These factors contribute to increased investment risk and can lead to unexpected fluctuations in the stock markets of BRICS countries.
3. Could a new BRICS currency challenge the dominance of the US dollar?
The introduction of a new BRICS currency could potentially challenge the dominance of the US dollar. While the impact remains debated among experts, if the new BRICS currency stabilizes against the dollar, it could reduce the effectiveness of US sanctions and diminish the dollar’s value.