Taking Profits in Brazil's Small Caps

04/15/2010 2:47 pm EST

Focus: ETFS

Jim Jubak

Founder and Editor, JubakPicks.com

With Brazil’s central bank likely to start raising interest rates at its April 27 meeting, I’m going to cut my short-term exposure to my favorite developing market by selling Market Vectors Brazil Small-Cap (NYSEArca: BRF). I’ve got an 8.3% gain in the exchange traded fund (ETF) since I added it to Jubak’s Picks on February 1.

The betting among economists is that the central bank will raise its target Selic rate from the current 8.75% to 11.25% by the end of 2010 to reduce inflation that’s now running at 5.2%. (For more on Brazil and inflation, see this recent post.)

Why sell this ETF rather than some Brazilian big-cap stock like AmBev (NYSE: ABV) that’s also in my Jubak’s Picks portfolio?

Small companies are especially vulnerable to increases in interest rates, since banks are a more important source of capital than they are for larger companies that have an easier time tapping the stock and bond markets. And any slowdown in Brazil’s domestic economy will have a bigger effect on exactly the small domestic companies targeted by this ETF than on larger Brazilian companies that export to world markets.

This is the second time I’ve profitably traded in and out of this ETF. I expect to revisit this position later in 2010, when interest rate increases have taken some of the steam out of Brazilian stocks.

Full disclosure: I own shares of Market Vectors Brazil Small-Cap ETF in my personal portfolio. I will sell that position three days after this post goes live.

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