US ETF Market Ushers In Active Investing in India, Brazil Stocks

(Bloomberg) -- Investors betting on Brazil and India as the markets least vulnerable to the turmoil in emerging markets now have the opportunity to buy stocks in those countries via actively-managed exchange-traded funds. 

The Global X Brazil Active ETF and Global X India Active ETF both launched Friday amid increased clamor for Brazil as it embarks on interest-rate cuts and for India as it overtakes China as the world's fastest growing major economy. The new funds, whose tickers are BRAZ and NDIA respectively, come at a time emerging-market volatility has spiked in the backdrop of an economic meltdown in China, debt distress across Africa, war in eastern Europe and political turmoil in Latin America.

While passive funds tracking indexes in the two countries have proved popular for long, active managers have always sought to highlight how tracking indexes missed out on a large portion of those sprawling markets valued at $3.6 trillion in Mumbai and $810 billion in Sao Paulo. High conviction trading ideas often emerge in these countries among companies not included in the big indexes, which are dominated by state-run companies in Brazil and conglomerates in India, said Malcolm Dorson, who will co-manage the portfolios with Paul Dmitriev.

“Some passive ETFs haven't always been able to beat their benchmarks, whose characteristics create an atmosphere where active management is paramount and helpful,” said Dorson. “We aim on having a high-conviction portfolio of 20-30 names, with significant research behind them.”

Brazil's Ibovespa is up almost 5% this year, gaining five times as much as the MSCI Emerging Markets Index. India's Sensex is also outperforming with a 6.8% advance. 

The South American nation, which earlier attracted bond investors and carry traders with one of the world's most aggressive monetary tightening, is now luring equity buyers with an early start to cutting rates. Thus, it is more of a “tactical” opportunity, said Dorson.

Investors seeking a refuge from the high-inflation, high-rate spiral in other emerging economies such as Turkey have begun favoring Latin American countries stealing a march over the Federal Reserve in the new easing cycle. Expectations are also growing for the nation to move forward with fiscal and tax reforms by year-end. 

Consumer Economy

Meanwhile, India's 430 million-strong middle class driving a domestic consumption story provides its markets relative immunity from global shocks. The country's exports amount 14% of gross domestic product, and are less affected by the slowdown in China or Fed rate hikes than most other emerging economies. 

Economists project the South Asian nation will grow at least 1.5 percentage points faster than China over the next two years. It's also benefiting from so-called friend-shoring opportunities, by cornering some of the high-technology manufacturing business that's moving out of China. 

“India is a very sound story for the next few decades,” said Dorson. “It's the best structural story, and not holding it now is the same as not owning China 20 years ago.”

The BRAZ fund currently favors financial stocks such as Banco BTG Pactual SA, B3 SA and Itau Unibanco Holding SA, consumer discretionary names including Lojas Renner SA and Raia Drogasil SA, and oil juniors. The fund is underweight utilities and state-run oil producer Petroleo Brasileiro SA.  

The NDIA fund is overweight financials and consumer staples, and underweight materials, utilities and energy. It's betting on names including SBI Life Insurance Co., Shriram Finance Ltd., Nestle India Ltd. and Apollo Hospitals Enterprise Ltd.

Global X has an extensive platform of more than 100 ETF offerings, and have over $40 billion in assets under management. Both BRAZ and NDIA have an 0.75% expense ratio, which is slightly above the average 0.60% expense ratio across currently active actively-managed emerging-market ETFs. The largest passively-managed ETF tracking Indian stocks charges 0.68%. 

--With assistance from Srinivasan Sivabalan.

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