The S&P 500 index is up more than 16% since January, making it one of the top-performing equity indices in the world. But several headwinds could derail growth over the coming quarters and investors may want to consider diversifying into other promising global markets, including emerging markets like India and Brazil.
In this article, we’ll look at two newly launched Global X ETFs targeting international markets with active exposure, and why you might want to consider adding them to your portfolio.
Why Invest in Active Funds?
Actively managed funds don’t have the best long-term track record. In fact, according to S&P Global, just 6.6% of them outperformed the S&P 500 index over the past 15 years. However, the international variety tended to fare better than their domestic counterparts, underperforming by 14.4% last year versus 29.4% for S&P 500 growth stocks. And many individual active international funds consistently outperform their benchmarks.
While the dispersion of returns in domestic markets tend to be low (particularly during late-stage bull markets), international and emerging markets have much broader ranges of returns, creating an opportunity for experienced managers to pick stocks. And while passive funds often invest in the largest companies (often state-run and not necessarily well managed), active managers can choose the best opportunities and leverage their expertise in otherwise opaque markets.
The rise of active ETFs—as opposed to mutual funds—offers investors a lower-cost and more tax-efficient investment vehicle. For example, the ETF creation and redemption process helps defer tax liabilities by relying on authorized participants to create and redeem large blocks of shares to meet demand. As a result, there are fewer or no capital gains distributions that lead to a large tax bill when using mutual funds.
India Looks to Build a More Formal Economy
India has become a popular investment destination with attractive demographics, a strong education system, and a democratic governance system. Over the past decade, the country has gone from the tenth largest economy in dollar terms to the world’s fifth largest economy, featuring 7.2% GDP growth last year and expectations for 6+% growth in 2023 and 2024. And new reforms could help further bolster growth over the coming years.
For example, a national identity program aims to connect millions to financial services and a tax overhaul could bring millions living outside of the formal economy into the fold. However, Prime Minister Narendra Modi’s infrastructure goals have been somewhat derailed by red tape, delays, and cost overruns. And climate change could present some long-term challenges, as India is one of the world’s most vulnerable countries.
The Global X India Active ETF (NDIA), launched on August 17, 2023, provides exposure to one of the fastest-growing economies in the world. With a focus on providing direct exposure to India’s economy, the fund managers seek high-quality business models and management teams across the country, focusing on domestic-driven growth over a five-year time horizon. Meanwhile, the 0.75% expense ratio is much lower than comparable mutual funds.
Currently, the fund holds a concentrated portfolio of 30 stocks with exposure to financials (30.6%), information technology (19.0%), and consumer staples (13.1%). The largest holdings include names like ICICI Bank Ltd. (IBN) (8.6%), HDFC Bank Ltd. (HDB) (7.7%), and Relianc (RIGD) (6.6%) with a weighted-average market cap of about $10 billion. And these companies have an average forward P/E ratio of 24.06x (FY 2023).
Top-Performing India-focused ETFs
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Expense |
|---|---|---|---|---|---|---|
| WisdomTree India Earnings ETF | EPI | ETF | No | $1.2 Billion | 14.22% | 0.85% |
| Columbia India ETF | INCO | ETF | No | $118.5 Million | 16.88% | 0.77% |
| Invesco India ETF | PIN | ETF | No | $144.7 Million | 11.74% | 0.78% |
Brazil Offers Resources & Promising Reforms
Brazil has become one of the best cyclical opportunities in the world thanks to its recent pivot from its central bank and a new fiscal reform package. Moreover, the country’s abundant natural resources and rapidly growing consumer market offer an attractive combination of export growth and long-term growth in consumer spending. As a result, capital inflows have started to pour into the country over the past couple of years.
Recently, President Luiz Inacio Lula da Silva’s administration committed to eliminating the primary deficit in its 2024 budget. Beginning in 2026, the country’s fiscal reforms will merge five levies into a value-added tax while shifting the tax basis from where goods are produced to where they are consumed. But despite this progress, the country remains vulnerable to China’s slowdown and a potential slide back toward former President Jair Bolsonaro’s party.
The Global X Brazil Active ETF (BRAZ) launched on the same date to provide exposure to Brazil’s dynamic economy. Like NDIA, BRAZ focuses on direct exposure to Brazil’s economy with a focus on high-quality domestic businesses and a four- to five-year time horizon. The fund also has a modest 0.75% expense ratio, making it one of the most affordable active funds providing exposure to the country.
The fund holds approximately 30 securities spread across the financial (32.0%), materials (17.7%), and energy (16.3%) sectors, which translates to more exposure to natural resources than the NDIA ETF. The largest holdings include names like Petrobras SA (PBR) (9.7%) and Vale SA (VALE) (9.4%) with a weighted-average market cap of nearly $20 billion. And these companies have an average forward P/E of just 15.53x (FY 2023).
Top-Performing Brazil-focused ETFs
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Expense |
|---|---|---|---|---|---|---|
| VanEck Brazil Small-Cap ETF | BRF | ETF | No | $32.7 Million | 29.1% | 0.90% |
| ProShares Ultra MSCI Brazil Capped ETF | UBR | ETF | No | $4.3 Million | 19% | 2.22% |
| First Trust Brazil AlphaDEX ETF | FBZ | ETF | No | $5.7 Million | 11.3% | 0.80% |
The Bottom Line
India and Brazil are two of the fastest growing economies in the world and present compelling investment opportunities. While Brazil has made tremendous strides in governance, the economy remains reliant on natural resource exports. At the same time, India has a fast-growing domestic economy, but has struggled when it comes to governance in recent years.
Global X’s new international active ETFs offer unique exposure to two of the fastest growing economies in the world. Investors looking for more than passive exposure may want to consider the funds to potentially generate market-beating risk-adjusted returns, as active managers could help mitigate many of the risks facing companies in these regions.