In a recent post we discussed the weak performance of Brazilian stocks over the past few years. But how do you know what your exposure is to Brazil (or any other country)? Unfortunately having only a general idea about the types of investments you own doesn’t answer that question.
Obviously if you own individual stocks in Brazilian companies, or a fund that invests solely in Brazilian stocks, those holdings will give you exposure to Brazil. But many other types of funds have Brazil exposure as well. Brazil makes up over half of the market value of Latin American stocks overall, so a fund designed to invest in Latin America will likely have a large exposure to Brazil. The same is true for broader emerging market funds: based on market value Brazilian stocks account for about 13% of emerging markets overall. More general international and global funds often have a small exposure to Brazil as well.
Yet even within these categories, the exposure to a specific country can vary dramatically. For example, the Invesco Developing Markets Fund and the iShares Emerging Markets Minimum Volatility ETF are both funds that invest in emerging market stocks. Yet Brazilian stocks make up almost 20% of the former and only about 6% of the latter. Furthermore, these numbers will change over time as markets move and as the fund managers change their views about which stocks they should be invested in.
There are even more dramatic differences for other countries. The two largest emerging markets funds by assets, the Vanguard Emerging Markets ETF and the iShares Emerging Markets ETF, are both “passive” funds that simply try to mimic a benchmark index of stocks. But they’re far from identical. Because they have different definitions of which countries qualify as emerging markets, South Korea is the largest country in the iShares fund and has a 0% weighting in the Vanguard fund.
For most investors, taking the time to investigate these details for every holding isn’t a reasonable option. Instead, having tools that allow you to easily understand your geographic exposure and let you know when it gets out of alignment can be a better alternative.