What is FBZ? (Pros, Cons, and Strategies)

Investors looking to diversify their portfolios often consider international ETFs to gain exposure to markets outside of the United States. One such option is the First Trust Brazil AlphaDEX Fund, commonly referred to as FBZ. This ETF focuses on Brazil, one of the largest and most vibrant emerging markets. If you're considering adding an international slant to your investment strategy, FBZ might just be what you need. Today, we'll explore FBZ, including its key features, pros, cons, and some investment strategies.

What is FBZ?

FBZ stands for the First Trust Brazil AlphaDEX Fund. This ETF aims to provide investment results that correspond generally to the price and yield of an equity index called the NASDAQ AlphaDEX Brazil Index.

The fund employs a smart beta strategy known as AlphaDEX, which focuses not just on market capitalization but on a variety of factors such as growth and value. This nuanced approach aims to deliver better returns through enhanced stock selection criteria designed to outperform traditional indexing methods.

Key Features of FBZ

• AlphaDEX Selection Methodology: Stocks in the NASDAQ AlphaDEX Brazil Index are selected based on a series of growth and value factors, including earnings momentum, price-to-book ratio, and price-to-sales ratio.
• Diversified Exposure: By focusing on Brazilian equities, FBZ offers diversified exposure to multiple sectors within the Brazilian economy, including financials, energy, and consumer staples.
• Semi-Annual Rebalancing: The fund is reconstituted and rebalanced semi-annually to ensure that it continues to meet its investment criteria.

FBZ Composition

FBZ predominantly invests in large and mid-cap Brazilian companies. You will find companies like Petrobras (PBR), Vale S.A. (VALE), and Itau Unibanco (ITUB) in its portfolio. The fund spans various sectors, making it a comprehensive vehicle for capturing Brazil's economic growth potential.

Pros of FBZ

Diversified Emerging Market Exposure

One of the primary advantages of investing in FBZ is gaining exposure to the Brazilian market, an emerging economy that offers growth potential not often found in more mature markets like the U.S. This makes FBZ a suitable choice for diversification.

Designed for Outperformance

The AlphaDEX methodology aims to outperform traditional market-cap-weighted indices. By incorporating multiple growth and value factors, FBZ aims to provide better returns over the long term compared to indices that don't employ this nuanced stock selection approach.

Sectoral Balance

FBZ offers a balanced exposure across multiple sectors of the Brazilian economy, reducing the risks associated with over-concentration in a single sector. This diversified approach helps mitigate volatility, a common concern in emerging markets.

Cons of FBZ

High Volatility

Investing in emerging markets like Brazil comes with higher volatility due to economic, political, and currency risks. The Brazilian market has experienced significant swings in the past, which could be daunting for risk-averse investors.

High Expense Ratio

FBZ has a relatively high expense ratio, usually around 0.80% per year, which can eat into long-term returns. Investors must weigh the potential for higher returns against the fund's cost.

Dependent on the Brazilian Economy

The performance of FBZ is strongly linked to the health of the Brazilian economy. Any economic downturn, political instability, or unfavorable government policies in Brazil can negatively impact the fund's returns.

FBZ Investment Strategies

Diversification Strategy

FBZ can serve as a complementary asset in a diversified portfolio. By adding Brazilian exposure, you can reduce the overall risk of your portfolio, given the low correlation Australian equities generally have with other global markets.

Long-term Growth Strategy

Given that the AlphaDEX methodology aims for outperformance, FBZ is well-suited for investors with a long-term investment horizon. If you believe in the potential growth of emerging markets like Brazil, holding FBZ for an extended period can provide substantial returns.

Risk Management Strategy

You can manage the risks associated with high volatility by limiting your allocation to FBZ. Instead of committing a large portion of your portfolio, a smaller exposure can offer the benefits of diversification without significantly increasing overall risk.

Regular Monitoring and Rebalancing

Due to the inherent volatility of the Brazilian market, periodic portfolio review and rebalancing are crucial. Keep an eye on both the economic indicators in Brazil and the performance of FBZ to make informed adjustments.

Conclusion

FBZ offers a compelling avenue for gaining exposure to the Brazilian market through a well-diversified and strategically designed ETF. While it comes with its set of risks, particularly high volatility and a higher expense ratio, the potential for significant returns exists for long-term investors who are willing to weather short-term fluctuations. As always, balancing FBZ with other assets and employing consistent monitoring and rebalancing can help maximize the benefits while mitigating risks.