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Time for a BRIC Breakup

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No doubt you’ve heard the arguments for why you should invest in BRIC countries and the equity funds linked to them. (BRIC is an acronym for Brazil, Russia, India and China.)

If you’re unfamiliar with the pitch, let me bring you up to speed: BRIC nations represent roughly 40% of the world’s population and already control around 20% of global GDP.

But wait, there’s more! By 2050 BRICs will dominate the global economy with $128 trillion in GDP, easily beating G7 nations who are projected to have just $66 trillion. Would you like me to quote more statistics, or are you sufficiently thrilled?    

Like many things in life, the BRIC concept sounds great on paper. But the unapologetic results tell a far less exciting story.

Over the past few years, the iShares MSCI BRIC ETF (BKF) has significantly underperformed broader diversified funds like the Vanguard FTSE Emerging Markets ETF (VWO). VWO has gained almost 21% going back five years, while BKF is down 0.63%. That’s a huge performance discrepancy to put it politely.

Yet, the recent underperformance of emerging market stocks versus developed countries (EFA) is no secret. It’s been a seven-year trend that will be a decade-old trend in just three short years, if it continues. But the inability of BRIC countries to collectively outperform peer emerging market nations during this period of subpar performance indicates that something else is badly amiss.

What could it be? One of the problems with the BRIC grouping is that two countries (China and India) are manufacturing-based economies and large importers, while the other two are huge exporters of natural resources (Brazil and Russia).

Unsurprisingly, this kind of oddball mixture produces oddball results. Although the SPDR S&P China ETF (GXC) and iShares India 50 ETF (INDY) have climbed 36% to 44% over the past five years, the Market Vectors Russia ETF (RSX) and iShares MSCI Brazil ETF (EWZ) have fallen 35% to 46%.

Put another way, the wonderful equity returns from China and India have been effectively canceled out by the subpar performance from Brazil and Russia.

In retrospect, putting the BRIC countries together may have seemed like a good idea at the time. When economist Jim O’Neill first eulogized the idea of marrying BRICs in 2001, they were among the biggest and fastest growing emerging market countries on the planet.

Today, the BRIC complex is still very big but not necessarily the fastest growing. This is especially true in times like now when half of BRIC countries are in the toilet, dragging down collective performance of the entire group. BRIC countries have dramatically changed from 15 years ago, yet the rigidity of the BRIC marriage has failed to adapt. In time, financial markets invariably find a way to disrupt well intended financial inventions, especially if they are hatched by institutions and individuals of supreme prominence. Once upon a time, BRIC looked invincible and was the go to choice for emerging market investors. But not anymore.       

The roadmap for advisors that want to invest in emerging markets but without the oddball results created by cute theoretical country blends like BRIC should be clear.

One, it’s better to invest via single-country ETFs that give you the direct and precise exposure you’re looking for. Two, you can invest using a broadly diversified low-cost emerging markets ETF.

Either of these two routes should save you the embarrassing client conversations on why everyone else’s emerging market funds are up but theirs.

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Ron DeLegge is the founder and chief portfolio strategist at ETFguide.com. His next free portfolio workshop for financial advisors takes place at 1 p.m. Eastern Time on Friday, Feb. 27.