BKF - BKF: This Fund Is No Longer The BRIC We Once Loved

Summary

• iShares MSCI BRIC ETF tracks a market cap-weighted index of Brazil, India, and China's economies.
• This used to be the BRIC fund, but Russia got the boot.
• The fund has gone on a wild ride this year, bottoming out in October before climbing 21% in the last three months.
• Despite its label, the fund is heavily weighted toward China and Hong Kong, representing 60% of the total fund.
• We rate BKF a Hold for now as we wait to see how the realignment plays out.

Byline Alex Rosen

Strategy

iShares MSCI BRIC ETF (BKF) provides exposure to an index of funds in three emerging markets: Brazil, India and China. Country and sector weights can vary significantly over time, as the volatility of emerging markets isn't always captured in the quarterly rebalancing.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: Non-U.S. Equity

• Sub-Segment: Emerging Markets

• Risk (vs. S&P 500): Average

Proprietary Technical Ratings*

• Short-Term (next 3 months): C

• Long-Term (next 12 months): C

* Our assessment of reward potential vs. risk taken

(Rating Scale: A=Excellent, B=Good, C=Fair D=Weak, F=Poor)

Holding Analysis

Prior to March 10, 2022, this was known as the BRIC fund and included Russia among the emerging markets. Since that time, the fund has divested all Russian holdings and rebranded as BKS. The fund holdings lean heavily toward China, 64%, followed by India 26%, and Brazil comes in at 10%.

From a sector standpoint, the fund is more evenly balanced with the prime sectors being Consumer Discretionary 23%, Financials 19%, Communication 13%, and IT 8%.

The top individual holdings are Tencent ( OTCPK:TCEHY ) 8.3%, Alibaba ( BABA ) 6%, Meituan ( OTCPK:MPNGF ) 3%, and Reliance Energy at 2.6%.

Strengths

Once upon a time, this fund was THE emerging markets fund. The one they taught about in finance class; Brazil, Russia, India and China. Sometimes even South Africa made the list. It was the darling of Wall Street. If you wanted exposure to emerging markets, every financial advisor recommended the BRIC. However, time passed and each country went its separate way. Russia decided its key to relevancy was through military conquest, and the other three said, we don't want to hang out with you anymore.

Thus, today we have BKF, which is still a friendship, but Brazil is really only invited to the party out of nostalgia. Brazil is like that old friend from high school that India and China haven't seen in twenty years. For a while the three reminisce, and then they talk about how Russia lost its way, but after a little while, they realize they don't have much in common anymore. They promise to stay in touch, but that becomes a once a year Christmas card and that's it.

Then we have India and China. Neighbors, they share a border, they trade a lot. They even throw sticks at each other once in a while. But yet they are intertwined on many levels. They are the true emerging markets (though China has a tough time making the argument that it still is emerging).

A stable China makes this fund attractive, and if there is any doubt, look at what happened since Xi Jinping was chosen to serve a third term as leader.

Weaknesses

As China goes, so does this fund. Despite its label as an emerging markets fund, it really is a China fund with a side of India, and a sprinkling of Brazil. The fund's lack of even distribution among countries makes it less attractive to investors who are looking for a true emerging market play.

There are many China ETFs out there, and with the loss of Russia and the underweighting of Brazil, BKF really struggles to distinguish itself. Its make up is not too dissimilar to AAXJ , for example, which actually holds less China then BKF.

Opportunities

If you believe in China and its future, but still want a broader global exposure, then BKF might be an attractive option. Whether China is an emerging market or an emerged market, it is definitely a growing market, even if the population isn't . As the global manufacturing leader, China certainly has a strong foundation from which to grow, and in the near future, it is easy to see where the opportunities are.

Threats

Brazil makes up ten percent of the portfolio, but has really been having a tough go of it lately. As the fortunes there remain in flux, all that's left of the once mighty BRIC is India and China. Each of these countries has its own issues, but the real threat to the fund is that it becomes just another China fund. Let's hope that doesn't happen, but it is a distinct possibility.

Conclusions

ETF Quality Opinion

Now that Russia is out of the equation, and the Brazilian anchor has been severely diminished, the fund, while not what it set out to be, actually looks a lot more attractive. Ignoring the country weighting, it has a nice mix of holdings across sectors and many recognizable stocks. The fund is something of a paradox in that respect. It does not do what it set out to do, but as a result has an attractive holdings portfolio.

ETF Investment Opinion

BKF is a very difficult fund to assess because of its quantum shift. On the one hand it has a nice portfolio, but on the other hand what is it? As a result we rate BKF a Hold until we gain further clarity on what exactly this fund is.

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