SSgA's New BRIC ETF Offers Very Different Exposure Than the Competition

State Street Global Advisors (SSgA) launched a new BRIC (Brazil, Russia, India, China) exchange-traded fund onto the American Stock Exchange on June 22. The SPDR S&P BRIC 40 ETF (BIK) tracks a float-adjusted, market capitalization weighted index of 40 countries from those “hot hot” countries. BIK charges 40 basis points (0.40%) in expenses.

The fund isn’t the first BRIC ETF in the U.S. That honor goes to the Claymore/BNY BRIC ETF (EEB), which launched in September 2006 and holds 75 American Depository Receipts (ADRs), or shares of foreign companies that trade on the U.S. market. EEB charges 0.60%, and has attracted over $270 billion in assets since inception.

Not surprisingly, the two funds offer very, very different exposure to these markets, starting right from the country level:

Those differences―particularly in the Russia vs. Brazilian exposure―are driven by the vagaries of the ADR market: To date, large Russia energy firms have been reluctant to list ADRs on U.S. exchanges.

Regardless of the reason, however, those differences trickle down into very different sector exposure. Although exact comparable data is not immediately available, BIK has significantly more Energy and Financials exposure than EEB, which has high weights in Telecom, IT and Materials. That is not surprising, considering that Russia is dominated by Energy exposure, while Brazil has more exposure to the telecommunications market.

Does BRIC Make Sense?
One key criticism of BRIC ETFs is that they are simply marketing tools, and that there is no rationale for investing in these four countries while avoiding the rest of the emerging markets.

It’s a legitimate issue, and one addressed head-on in a BRIC white paper (pdf file) from Standard & Poor’s (S&P). Because of free-float weighting, S&P notes that the BRIC countries may be underrepresented in the popular MSCI Emerging Markets Index. Specifically, S&P says that true emerging markets like the BRIC countries have poorly developed capital markets, which causes them to be underrepresented in the equity markets compared with more advanced developing countries.

It compares the BRIC weightings and GDP contribution with the contribution of South Korea, South Africa, Taiwan and Mexico:

With GDP in mind, it’s worth revisiting the weightings of the two ETFs. BIK gets the nod as more representative of global GDP, but clearly, neither fund is perfect on that front.