Taking profits in Brazil's small caps

With the possibility of Brazilian interest rates heading up, it's time to cut exposure.

By Jim J. Jubak Apr 15, 2010 2:58PM

Jim JubakWith 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 (BRF)


I've got an 8.3% gain in the exchange-traded fund (ETF) since adding it to Jubak's Picks on Feb. 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 post.)


Why sell this ETF rather than some Brazilian big-cap stock like AmBev (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.


At the time of this writing, Jim Jubak owned shares of Market Vectors Brazil Small-Cap ETF in his personal portfolio. He plans to sell that position in three days.

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