Pros and Cons of BRICS ETFs

What Are BRICS ETFs?

BRICS exchange-traded funds (ETFs) invest in the emerging markets of Brazil, China, Egypt, Ethiopia, India, Iran, Russia, Saudi Arabia, South Africa, and the United Arab Emirates (UAE).

BRICS ETFs offer exposure to important emerging markets in a single fund, providing convenient access to stocks and bonds from these countries. As emerging markets, BRICS countries are expected to experience higher economic growth than developed markets—as well as heightened volatility and uncertainty. This has led to increased interest in BRICS ETFs as an investment.

The BRIC acronym was coined in 2001, after which the countries of Brazil, Russia, India, and China allied their fast-growing developing economies. In 2010, BRIC added South Africa, becoming BRICS.

After Russia invaded Ukraine in 2022, many BRICS indexes dropped Russia from their portfolios, and Russia-specific ETFs were delisted from American exchanges. In 2024, five more countries joined the alliance: Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE. The expansion marks a push by some BRICS members to balance out a U.S.-dominated world economy.

Key Takeaways

BRICS ETFs offer an avenue to invest in Brazil, China, Egypt, Ethiopia, India, Iran, Russia, Saudi Arabia, South Africa, and the UAE.
These funds are appealing because of the growth prospects of the BRICS countries.
At the same time, emerging market countries like the BRICS often face heightened volatility and unique risks.
Because they trade like shares on American exchanges, these ETFs offer convenient access and diversification across these emerging markets.

Pros and Cons of Investing in BRICS ETFs

Pros

Higher potential returns
Geographic diversification
Emerging markets exposure
Convenient
Cost-effective

Cons

Greater volatility and risk
Political, regulatory, and economic uncertainty
Currency exposure

Pros of Investing in BRICS ETFs

Potential for Higher Returns

The higher projected gross domestic product (GDP) growth of BRICS economies compared with developed markets suggests a strong return potential for BRICS ETFs. As they expand, investing early in these emerging markets could supply higher long-term returns.

BRICS growth projections are driven by increased industrialization, urbanization, and consumer demand within these economies. The 2024 additions to BRICS mean it covers not only about 3.5 billion people and many consumers, but also about 42% of global crude oil output.

As these countries develop, companies within these markets could see significant gains in revenues and profits, translating into higher stock prices and greater returns for investors in BRICS ETFs.

BRICS countries also tend to have younger populations and a growing middle class. These demographic shifts could lead to increased domestic consumption and a growing demand for various products and services from both domestic and foreign producers.

Diversification

BRICS ETFs offer diversification through exposure to different emerging markets in a single fund. This can help balance an investment portfolio heavily weighted in U.S. and European stocks and bonds. Indeed, most of the BRICS countries are significant actors on different continents, providing geographical diversification and broader emerging market exposure. They also have major oil reserves and other significant raw materials exports important for the world economy.

While not directly contributing to higher returns, the diversification of BRICS ETFs can help achieve a more balanced portfolio. Diversification can enhance returns while mitigating risks compared with investing only in developed markets. For example, emerging economies may grow when developed markets like the United States or Western Europe stagnate.

Convenience

BRICS ETFs offer a straightforward way to invest in a diverse range of companies across its member countries. Investing in individual stocks in these countries would require a deep understanding of each market, including local economic conditions, regulations, and market dynamics. BRICS ETFs streamline this process by providing a single investment vehicle encompassing stocks across each country. By buying shares in a BRICS ETF, investors thus gain exposure to a basket of stocks spread across different sectors and regions in a single transaction.

Direct investment in international markets (such as opening a foreign brokerage account) also often involves higher transaction costs and minimum investment thresholds, which can be prohibitive for individual investors. BRICS ETFs typically have lower transaction costs than direct international investments, allowing investors to gain exposure to these markets with relatively small investment amounts.

Because they trade like shares, ETFs are liquid securities that can be bought and sold throughout the trading day, with many brokerages today offering commission-free trading in most ETFs.

Emerging markets, including the BRICS countries, are often less efficient than developed markets. This means that information might not be reflected in stock prices as quickly or accurately as in more developed markets. Skilled investors and fund managers can exploit these inefficiencies to achieve higher returns. However, it’s important to note that these inefficiencies can contribute to higher volatility and increased investment risk.

Cons of Investing in BRICS ETFs

Higher Volatility

Emerging markets tend to experience larger price swings. Therefore, a primary concern with BRICS ETFs is their potential for higher volatility than developed market investments.

Stock markets in the BRICS countries can experience sudden fluctuations because of various factors, including economic uncertainty, political instability, trade disruptions, and global market dynamics. This could lead to significant short-term swings in the value of BRICS ETFs, which could be unsettling for risk-averse investors.

For example, some BRICS economies, like Brazil, Russia, Saudi Arabia, and the UAE, rely heavily on commodity prices. This means that the performance of ETFs invested in these countries can be disproportionately affected by global commodity market fluctuations and geopolitical events, adding other layers of risk.

Political, Regulatory, and Economic Instability

The political and economic environments in the BRICS countries can be less stable than in more developed economies. Changes in government policies, regulations, and political unrest can significantly impact these markets.

For instance, armed conflict or sanctions have affected Russia, while regulatory changes can significantly impact China. Such instabilities can directly affect the performance of companies within BRICS ETFs.

Regulatory environments in the BRICS countries can also be less robust than in developed markets, leading to concerns about corporate governance and transparency. This can make it more difficult for investors to accurately assess the risks and prospects of the companies within the ETF.

Currency Risk

When investing in BRICS ETFs, investors are also exposed to currency risk. Fluctuations in the value of these countries’ individual currencies against the investor’s home currency can affect returns from these ETFs.

When those currencies weaken vs. the U.S. dollar, it negatively affects the relative performance of those holdings. The fact that the BRICS countries have experienced periods of high inflation in the past has also dampened currency values.

Currency risk adds an extra layer of complexity and can either enhance or erode investment returns, depending on currency movements.

Factors to Consider When Investing in BRICs ETFs

When researching BRICS ETFs, review their holdings, expense ratios, liquidity, assets under management, and historical returns and compare them with each other and benchmarks. Higher expense ratios, for example, can erode net returns, all else being equal.

Comparing several BRICs ETFs can help identify a suitable fund for your portfolio and risk tolerance.

It’s also important to diversify your exposure or pair BRICS ETFs with other emerging market ETFs rather than concentrate your exposure in the BRICS countries. Broader emerging market ETFs could provide more balanced exposure.

Other Emerging Market ETFs

In addition to ETFs that track stocks in the BRICS countries, there are other emerging markets funds to consider. The Vanguard FTSE Emerging Markets ETF (VWO), iShares MSCI Emerging Markets ETF (EEM), SPDR Portfolio Emerging Markets ETF (SPEM), and Schwab Emerging Markets Equity ETF (SCHE) all have broad-based emerging markets exposure, with BRICS among those from several other countries.

Individual country ETFs, like those for Indonesia, Mexico, Poland, Thailand, Turkey, and Saudi Arabia, among others, also have emerging market exposure.

Top BRICS ETFs

Top BRICS ETFs
ETF	Ticker	Mandate	Assets Managed ($Millions)	Expense Ratio
iShares MSCI BIC ETF	BKF	Provides broad exposure to securities from three developing countries in the BRICS region: Brazil, India, and China	$67.62	0.69%
iShares MSCI Brazil ETF	EWZ	Tracks an index of large-cap and midcap companies from the B3 exchange in Brazil	$5,640	0.59%
iShares MSCI Brazil Small-Cap ETF	EWZS	Tracks a market-capitalization-weighted index of Brazilian small-cap firms	$266.0	0.59%
Franklin FTSE Brazil ETF	FLBR	Tracks a market cap-weighted index of Brazilian large-cap and midcap stocks	$174.78	0.19%
iShares MSCI India ETF	INDA	Tracks a market-cap-weighted index of the top 85% of firms in the Indian securities market	$8,040	0.65%
WisdomTree India Earnings Fund	EPI	Tracks a total market index of Indian companies selected and weighted by earnings	$2,150	0.85%
Invesco India ETF	PIN	Tracks an index of India-listed stocks, screened for yield and quality and weighted by market cap	$209.8	0.78%
iShares Trust—China Large-Cap ETF	FXI	Tracks a market-cap-weighted index of the 50 largest Chinese stocks traded on the Hong Kong Stock Exchange	$4,040	0.74%
SPDR S&P China ETF	GXC	Tracks a broad, market-cap-weighted index of investable Chinese shares. The fund’s holdings stretch across all market cap sizes.	$622.69	0.59%
iShares MSCI China ETF	MCHI	Tracks a market-cap-weighted index of investable Chinese shares. The fund stretches across all market cap sizes.	$5,100	0.59%
iShares MSCI South Africa ETF	EZA	Tracks the performance of a market-cap-weighted index of South African stocks. It captures 85% of the publicly available market, excluding all small caps.	$265.6	0.59%

Source: VettaFi, ETF Database

Note that two Russia-focused ETFs, RSX and ERUS, were delisted following Russia’s invasion of Ukraine in 2022.

Which of the BRICS Countries Has the Highest GDP?

China has the largest gross domestic product (GDP) of the BRICS countries, at just under $18 trillion in 2022, making it one of the largest economies in the world. Despite its significant economic growth and global influence, China’s classification as an emerging market in the financial and investment world can seem counterintuitive. However, this designation is based on its low per-capita GDP, restrictive regulatory environment, capital controls, and limited market accessibility to foreign investors.

Who Created the Category of BRICS?

The concept of BRICS was coined by Jim O’Neill, a British economist, in 2001. At the time, O’Neill was the chair of Goldman Sachs Asset Management. He introduced the term in “Building Better Global Economic BRICs,” published as part of the Global Economics Paper series by Goldman Sachs.

Which BRICS Country Has the Highest Economic Growth?

Here are the estimated GDP growth rates for 2022:

India: 7.2%
Ethiopia: 5.3%
China: 3.0%
Egypt: 6.6%
UAE: 7.9%
Saudi Arabia: 8.7%
Iran: 3.8%
South Africa: 1.9%
Russia: -2.1%
Brazil: 2.9%
Argentina: 5.0%

What Is the Most Popular Emerging Market ETF?

The Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) are among the most popular and widely traded emerging market ETFs. These ETFs are favored because of their broad exposure to a range of emerging market economies, large assets under management, and liquidity.

Which Are the Most Used BRICS Benchmark Indexes?

MSCI BIC Index: Broad index of Brazil, India, and China stocks. Widely tracked benchmark for emerging market equity performance.
Dow Jones BRIC 50 Index: A market capitalization-weighted stock index composed of 50 of the most liquid and largest companies in BRICS (excluding Russia after its invasion of Ukraine).
S&P BRIC 40: Tracks the 40 largest companies in the BRICS countries. Focuses on liquid large-cap stocks.
FTSE/RAFI BRIC 50 Index: Includes 50 stocks from the BRICS countries weighted by market capitalization. Designed to represent the leading blue chip companies.

The Bottom Line

BRICS ETFs provide exposure to the potentially high-growth emerging markets of the member countries in this alliance in a single fund. This offers convenience compared with picking individual stocks in each market.

The key advantages of BRICS ETFs are diversification, access to fast-growing economies, and the possibility of generating higher long-term returns than developed markets. However, there are also greater risks involved. Volatility tends to be higher because of political instability, slower growth, and currency fluctuations. Also, the BRICS countries face challenges with corruption, infrastructure gaps, and economic reforms.

For investors with high risk tolerance, a small allocation to BRICS ETFs can provide portfolio growth potential. But limit exposure to 5% to 10% of the total portfolio value. Emerging markets should be balanced with holdings in stable developed markets.

Always conduct thorough research before selecting a specific BRICS ETF. Compare expenses, liquidity, holdings, and historical performance against other funds and benchmarks. Diversify across several emerging market ETFs rather than concentrating solely in the BRICS countries.