Alan's Finance Blog

Six Ways to Brazil

Anyone familiar with international investing knows about Brazil. It’s hard to ignore the fifth largest country in the world by geography and population, the South American commodities powerhouse, and the largest economy in Latin America!

Over the past five years, Brazil’s largest ETF (EWZ) has posted a better than 200 percent cumulative return, while the S&P 500 is just shy of breaking even. Brazil puts the ‘B’ in the BRIC emerging market economies, and there’s a good reason why …

As the global economy falters, emerging markets like Brazil have been enjoying a steady rise in capital inflows and new opportunities. Global infrastructure has driven down the cost of doing business in South America compared to New York City. Although the ride will not always be smooth, Brazil still looks much more attractive compared to any broad-based U.S. investment.

Brazil: The Crown Jewel of
The Southern Hemisphere

Brazil is the economic jewel of the Southern Hemisphere. With a mixture of agricultural, mining, manufacturing, and service sectors, Brazil is one of the more diversified emerging markets.

Brazil dominates Latin America with its rich natural resources. It accounts for most of the world’s soybean trade and nearly 80 percent of global orange juice production. Brazil is also one of the few Western hemisphere countries that is energy independent — thanks to ethanol, abundant oil reserves, and hydroelectric power.

But Brazil isn’t satisfied with its inherited resources. Instead, the Brazilian economy is improving nearly every year …

U.S.-backed General Motors (GM) just opened up a $100 million facility in São Caetano do Sul. It’s one of five global product development sites the car maker runs. GM sees the growth potential of the Brazilian auto market and the cheaper skilled labor force Brazil offers.

The famous Christ the Redeemer statue has been overlooking this Brazilian harbor for nearly 80 years and is now overlooking a bustling economy.

But GM isn’t alone …

Fiat, Volkswagen, and Ford are investing in Brazilian engineering and design capacity. That’s because Brazil is expanding its infrastructure. With the expansion, forests are being cleared, roads are being built, and cars are being sold to an employable population.

And with each new mile of road being laid, another car is driven by a happy employee on their way to work in the new Brazil. So it’s no surprise that as the U.S. auto market shrank in 2009, vehicle sales in Brazil grew 11 percent.

There are six ways to gain access into Brazil’s burgeoning economy using easy-to-buy ETFs:

Play #1—
Ride the Large-Caps
In Brazil (EWZ)

Large-cap stocks represent the largest companies by market capitalization — and Brazil has some great large-cap stocks. The cream of the crop can be found in iShares MSCI Brazil ETF (EWZ).

In two weeks, EWZ will celebrate its tenth anniversary as Brazil’s first ETF. Introduced on July 14, 2000, it has gathered more assets than any other non-U.S. single-country ETF. It currently has more than $9 billion under management.

iShares Brazil holds notable large-cap banks, such as Banco Bradesco Sa Brad and Itau Unibanco, and steel manufacturing giant, Gerdau SA. In addition, EWZ invests in Brazilian energy behemoths OGX Petroleo and Petroleo Brasileiro.

These companies give you a wide swath of the Brazilian economy and keep you away from smaller, sometimes more volatile companies.

Play #2—
Hitch Your Portfolio to
Brazilian Mid-Caps (BRAZ)

The Global X Brazil Mid Cap ETF (BRAZ) just started trading last week. It’s the first ETF to target the mid-cap companies of Brazil and offers access to the country’s internal growth.

Bruno del Ama, CEO of Global X Funds says …

“Such companies are currently sparsely represented in existing exchange traded fund options, yet are poised to benefit the most from the country’s solid macro fundamentals.”

The reason you might pick mid-caps over the large-caps is the internal play on Brazilian growth. Whereas large-caps tend to have more ties to the global economy, mid-caps are more focused on internal consumption. And BRAZ is a great way to buy Brazil, with less exposure to the global economy.

To tap into the Brazil’s internal consumer growth, consider BRAZ or BRF.

Play #3—
Hook onto Small-Caps
In Brazil (BRF)

Brazilian small-caps have exploded over the past couple of years. While the rest of the global market has endured everything from panic selling, flash crashes, and central bank-inspired bubbles, Brazil’s smaller companies have enjoyed a relatively steady, substantial climb up the chart.

The easiest way to tap into Brazil’s small-cap growth is with Market Vectors Brazil Small-Cap ETF (BRF). Like BRAZ, BRF is more of a play on the internal growth in Brazil.

More than 30 percent of BRF’s holdings are in the consumer sector and less than 1 percent is in energy. Not only is BRF unlike EWZ from a market cap perspective, but the sector composition is also vastly different.

Play #4—
Buy Brazilian
Infrastructure (BRXX)

Brazil is investing heavily in the infrastructure needed to support its internal growth.

If anything, Brazil is known for its voracious appetite for internal growth, almost to the exclusion of anything else. While the environment sometimes plays second fiddle to economic concerns, you should still consider the purest way to buy into that internal development …

Launched in February, EGS INDXX Brazil Infrastructure ETF (BRXX) tracks 30 stocks involved in the development and maintenance of Brazil’s physical infrastructure.

Play #5—
Go Super-Long
Brazil (UBR)

Do you like everything you see about Brazil but want to improve your return with every uptick of Brazil’s market? Then ProShares Ultra MSCI Brazil (UBR) is the ETF for you.

UBR “seeks daily investment results, before fees and expenses, that correspond to 200 percent of the daily performance of the MSCI Brazil Index.” So to go super-long Brazil, consider UBR.

Play #6—
Brazilian Defensive
Play (BZQ)

As I mentioned earlier, the upward path for Brazil will not always be a smooth one. In fact, since it is still classified as an emerging market, I expect its markets will undergo numerous bear markets while still maintaining long-term growth.

And when those inevitable setbacks come along, you can exploit the opportunity with ProShares UltraShort MSCI Brazil (BZQ).

BZQ is a 200 percent inverse ETF, which means when the Brazil index goes down 1 percent, this fund should go up 2 percent. It’s a leveraged fund so it’s a great way to play the short-term downside moves, but longer-term performance will be a function of the volatility.

What’s Next for Brazil …

You might be thinking that with six different ETFs to choose from, there would be no need for any more.

Well, just like there are more than six ETFs for the U.S., there will likely be more that invest in Brazil. In fact Global X, the company behind BRAZ, has already made plans to introduce a family of Brazil sector funds.

So there you have it. Six ways to invest in Brazil today and more in the pipeline. Good luck!

Best wishes,

Ron

Add Energy Income with an MLP ETN

You’re probably having a tough time these days if you live off the interest from your investment portfolio. For example, according to Bankrate.com, money market accounts are now yielding a paltry 0.76 percent (nationally).

There is no big mystery why this is happening …

Ever since the banking system started blowing up back in 2008, Ben Bernanke and his Federal Reserve have kept short-term interest rates at historic lows. That’s great for bankers, terrible for savers.

Many investors are watching their income slide.

These low rates have income-investors looking for new sources of steady interest and dividends. The alternatives are few. And I’m concerned that some people are so desperate that they’re risking their principal in ways they don’t even realize!

The truth is that there is usually a direct relationship between risk and reward …

• If near-absolute safety is what you want, you can get it from Treasury bills and bank savings accounts, but the interest rate will be very low.

• If you must have more yield, it’s possible — as long as you’re willing to take on more risk.

In other words, there are no free lunches. The best you can do is find a happy medium somewhere on the risk-reward scale.

Today I’m going to tell you about an income investment that I think is a good balance — especially right now in this low-interest rate environment.

Master Limited Partnerships:
Energy Income

You might have heard about master limited partnerships (MLPs). They throw off nice income and have growth potential, too.

MLPs own energy pipelines and storage facilities.

MLPs do this by concentrating on the storage and transportation of energy products. After all, no matter how cheap or expensive oil may be, it still needs to get to you. And the tank farms and pipeline companies are paid well for their services.

My Money and Markets colleague, Nilus Mattive, wrote a terrific column back in 2008 about the MLP market. It’s a good introduction to the topic.

You can, as Nilus says, invest directly in individual MLP issues. I know many people do this very successfully. There are some drawbacks, though …

For one, the tax advantages of MLPs can create some paperwork headaches. You’ll receive “K-1″ forms from each partnership. Many people find the IRS requirements aggravating when it comes time to do their tax returns.

Owning MLPs can complicate your tax return.

You can also face potential tax problems if you hold these partnerships inside an IRA or other retirement accounts. So be sure to consult a tax advisor before you put a MLP in one of these accounts.

As with individual stocks, it’s often better to diversify by holding a broad portfolio of MLPs. Of course this also multiplies the paperwork problem. So wouldn’t it be nice if you could get a whole package of MLP issues in one convenient package?

Well, now you can!

MLP ETNs:
Good Things in Nice Packages

Several exchange-traded notes, or ETNs, now track major MLP sector indexes. They give you exposure to MLP investments in a convenient package with just one trade. They also greatly streamline the income tax reporting.

Sounds great but there are some drawbacks. As I’ve written before, the ETN structure is riskier than it looks. That’s because you don’t really own the MLPs that make up the index your ETN tries to follow. What you own is a bond, issued by a bank, whose return is tied to the index.

This is called “counterparty risk.”

If your ETN sponsor should go belly-up, you could lose part or even all of your investment. Is this a big danger? No, but the possibility is real. Think about Bear Stearns and Lehman Brothers.

Whether the risk is worth taking is a personal decision for you. If you are prudently diversified and pay attention to your investments, then the counterparty risk might be acceptable.

Currently there are three ETNs to choose from that specialize in the MLP sector. You may want to consider these for the income-generating part of your portfolio.

• JPMorgan Alerian MLP Index ETN (AMJ)

• UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)

• Credit Suisse Cushing 30 MLP Index ETN (MLPN)

All three of these ETNs have an attractive yield and good assortment of MLP issues. One big difference among them is that MLPN uses an equal-weighting methodology while the other two are weighted by market capitalization. This means MLPN is somewhat more diversified.

Best wishes,

Ron

Why you will absolutely fail in trading if you don’t master this

There are many misconceptions about money management. Most think it means trading with stops, but that is only a small part of it. Below is a short part of the complimentary report I’ve found called “How to Safely Double Your Profits in 2009 Trading ETFs.” This little tip alone could save your trading account.

Why use risk controls?

Every trader/investor must guard himself against drawdowns, which refers to the percentage drop in his account size after one losing trade or consecutive losing trades. For example, imagine that after losing a few trades in a row, your $20,000 account is reduced to $12,000; that would be a drawdown of 8,000/20,000 = 40%. If I were to ask some new traders, “In order to be back up to $20,000, what percentage return do you need to generate?” Many would answer, “Since I lost 40%, I have to make back 40%!” This couldn’t be more wrong! Note that after losing 40%, the trader now starts with a lower base, i.e. to undo the $8,000 loss, the return he needs to generate is 8,000/12,000 = 66.6%! That is why I share free training videos on my website to help dispel some of the myths of trading.

The more severe the drawdown, the harder it becomes to undo the damage, as shown in the numbers below.

Drawdown % %Required to get back to break even
10%                  11.1%
20%                  25%
30%                  42.8%
40%                  66.6%
50%                  100%
60%                  150%
70%                  233.3%
80%                  400%
90%                  900%

That is why all professional money managers only risk 1-2% per trade. It’s because no matter how good your trading system is at some point it is a statistical fact you will have 10 losers in a row. Based on risking only 1-2% per trade this is only a 10-20% drawdown and easily recovered. 99% of the hype trading and investing courses in existence don’t say or do this. They say risk 5-10% per trade. It is wrong and will cause you serious financial pain if you follow their advice.

Many of them also use arbitrary stop loss advice. For example, they say, “Place your stop at $100.10 because that is on the other side of a major support or resistance, trend line, MA, etc.”

This makes your risk based on the size of the stop. That is also wrong because the risk can be too large and it’s not the same risk on each trade.

Others reverse this and say risk only 2% total period and let that determine your stop. This is also wrong and will hurt you because it is important to have the correct technical stop.

The answer is to do both. Use a percentage and technical stop together. It works like this. Let’s say the technical stop is $100.10, but based on your entry price that is a 3% risk. Since your plan calls for a 2% risk you simply lower the number of shares you are trading. This lets you stay within your 2% risk and have the correct technical stop. This is exactly what most professional money mangers do.

Some say that this will lower their profits because of trading fewer shares. So what! Study the numbers above again. You know the old quote, “More risk equals more reward.” Well it’s not always true. Sometimes more risk equals more risk! If you lose your money you have no chance to make a profit. Even losing 50% is disastrous because you would then need to make 100% to get back to even.

Like Warren Buffet says, there are only two rules in investing. Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.

I’d like to add a third rule. Correct money management and position sizing must be mastered to ensure your long term success.

The good news is that it is easy to have correct money management and position sizing. I just explained how to use a combo of a % stop and a technical stop. If you want more of an explanation please visit the free video area on this website and click on the “Why have risk controls” video.

The system of entries, stops and profits taking is only half of your key to success. The other half is money management. If you get this part wrong you will lose your account every time regardless of how good your system is.

Click here for a newsletter on how to safely average 6% per month trading Exchange-Traded Funds.

http://www.etftrendtrading.com/cmd.php?af=1115334

Thanks, and good luck!

PS- In order to access these powerful FREE videos you must first opt in for the complimentary report.