Stay On Sidelines With BRIC Funds

With the Russian ruble down almost 30 percent this year and India stocks at all-time highs, the divergence in the group is unsettling.

It's easy to dismiss the "Brazil, Russia, India, China" market as an odd amalgam that's gained popularity only because it has a conveniently easy-to-pronounce acronym. That would belie the fact that many investors still view the quartet as a kind of "sweet spot" in the emerging market spectrum, and there's roughly $750 million allocated to the three major ETFs tracking the space.

Because of Russia's very bad year, it would be logical to assume that the worst-place finisher would be the ETF with the highest weighting in Russia:

Which would lead you to the Guggenheim BRIC ETF (EEB | C-53). But you'd be shockingly wrong. Here's how the three funds have actually fared:

As expected, EEB is the loser here, with the winner—if you can call it that—being the SPDR S&P BRIC 40 (BIK | B-66) and Analyst Pick iShares MSCI BRIC (BKF | B-96) splitting the difference, both about flat on the year.

But what's shocking to me is that none of these funds is doing worse. The reason, however, is simple:

This chart maps the four component MSCI indexes against the iShares MSCI BRIC ETF (BKF). That top line is India, more than offsetting the incredibly depressing blue line, which is Russia. Brazil and China run right down the middle, although Brazil was having a nice year until the leaves started turning in New England.

On one hand, the fact that Russia and India have such radically different performances this year is the whole point of diversification—if your alternative had been to be 100 percent in Russia, you're very happy for a little India diluting your position. But the flip side is, if you were blindly going after "the big emergers," then you've sat squarely in the sights of Russian policy for a long, long time.

So what's an investor to do at this point?

Well, the Russian situation remains very much in flux. The biggest problem for investors isn't so much the fate of specific Russian companies that make up the index, but the value of the ruble.

The ruble bottomed out at negative 30 percent on the dollar just Friday, but is rallying today on pledges from the Bank of Russia to support it. The chart above is pure economic warfare. Even Putin is being forced to admit that sanctions against Russia stemming from the Ukraine conflict are hurting, and it's hard to see how investors can call a bottom here as anything more than a bet.

Contrast that to the performance of India and the rupee:

While technically the rupee floats freely, in reality, the Reserve Bank of India has historically managed the currency through market actions to minimize its volatility to the U.S. dollar. That's meant that the recent rally in India has been entirely available to U.S. investors without any currency hedging required. That growth has been the result of strong GDP (just shy of 6 percent) and pro-market reforms (and just plain governmental stability) from the Modi administration.

Of course, with India's stock markets at all time highs, rafts of market pundits are calling a top, putting BRIC investors in the unenviable position of trying to both call a bottom in Russia and avoid a top in India.

Sounds like sideline time to me.

At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.