Published: March 17, 2010

Investors with a pulse have no doubt heard about Brazil's potential by now. After all, given the multi-year run-up in Brazil's main exchange, the Bovespa, and the announcement that the 2016 Olympic Games will be held in Rio de Janiero, it's a little hard to ignore. But make no mistake -- this country is just getting started.

Brazil already has a litany of accomplishments to boast about: reducing quadruple-digit hyperinflation as recently as the mid-1990s to mid-single digits today, reducing massive debt levels and lowering unemployment. Along with this, also count the transformation from the world's largest emerging market debtor to becoming a creditor nation with an investment-grade rating. Factor in an enormous wealth of commodities from timber to sugar to oil -- and you begin to get the idea.

All of which goes to say that while Brazil has come a long way, there is still much ground to cover. And while exchange-traded funds such as iShares MSCI Brazil (NYSE: EWZ) give investors a snapshot of the Brazilian economy, it is only skin deep. For example, energy and materials make up 55% of EWZ's portfolio. Like many broad developing-market ETFs, it holds large-cap, export-driven behemoths like mining giant Vale (NYSE: VALE) that are dependent on demand from other countries rather than internal forces.

That's not to say EWZ is a bad option for investors. It just depends on what you're looking for. Instead, how about a new twist on Brazil? Something that captures what's going on inside Brazil rather than what's stimulating growth from the outside? And something that holds the future powerhouses of Brazil and not the lumbering giants?

Market Vectors Brazil Small-Cap ETF (NYSE: BRF) does just that. The fund is one of a string of recent specialized, country-specific ETFs to hit the market.

Despite all the progress, Brazil still as a long way to go. Although not at the oppressive levels of the past, poverty remains high. If unemployment can remain relatively low and wages rise, this country of around 200 million people could become a major consumer powerhouse. Fortunately, that's right in BRF's wheelhouse.

There are a few key factors to note regarding the small-cap focus of this fund. It is likely to be more volatile than funds like EWZ, but could potentially have more upside. So far that has been the case, as shown by the table below:

The top two sector weightings for BRF are financial services (31.0%) and consumer goods (15.5%). Many of BRF's top holdings may be unfamiliar to attuned observers of emerging markets like Brazil. That's OK. Just know that many of the holdings are up-and-comers that could be tomorrow's giants in Brazil. BRF is a play on the rise of the consumer within Brazil, so that's to be expected. And no holding accounts for more than 5% of the portfolio, so the risk is evenly spread.

An emerging middle class would be an enormous step forward for Brazil. BRF has already given investors enormous returns since inception, but it should have a lot more ground to cover should a middle class emerge. Any time a new member joins the ranks and demands banking services, health care, grocery stores and housing, BRF's holdings will be winners. The fund is an excellent candidate for investors looking for niche international diversification.

-- Brad Briggs
Staff Writer
Street Authority

P.S. Exchange-traded funds are the only investment vehicle on the planet that let you so effortlessly tap into profit machines in far-flung countries like Brazil, China, India... or wherever else there's rip-roaring growth beating the pants off of U.S. stocks. That's why it's so important that you're hearing about our premium ETF recommendations. Right now 29 out of 29 of these picks are making money -- and 23 of them are up double-digits or better. Our February pick -- our favorite way to play Chile -- is already up +82.8% annualized. Our next recommendation will be out in the coming days... don't miss it.