Can I Invest in BRICS? How to Start Investing

The BRICS group, comprising Brazil, Russia, India, China, and South Africa, represents a significant collection of emerging economies. Formed in 2001, BRICS evolved into an informal intergovernmental organization, enhancing economic and diplomatic cooperation. This bloc aims to provide a counterweight to traditional Western influence, advocating for a more multipolar world order. The group has recently expanded, increasing its economic and geopolitical footprint. Investors are interested in these markets due to their large populations, vast areas, and growth potential.

Exploring Direct Investment Avenues in BRICS Economies

Investing directly in BRICS economies involves focusing on assets within these nations. Equities of companies based in BRICS countries offer a primary avenue for direct exposure. These companies operate across diverse sectors, including technology, finance, consumer goods, agriculture, and energy. India’s stock market, for example, is driven by its technology, finance, consumer goods, and pharmaceutical industries. Brazil and Russia, with resource-based economies, see their stock markets influenced by commodity prices like agriculture, mining, oil, and gas.

Beyond equities, sovereign bonds issued by BRICS governments present another direct investment opportunity. These bonds represent debt issued by national governments to finance public spending, offering fixed income streams. BRICS sovereign bonds can offer higher yields than traditional developed markets, reflecting differing economic landscapes and perceived risks. China’s government bonds, for example, have historically shown lower risk, while Brazil’s and India’s bonds have offered compelling yields.

Corporate bonds from companies within these nations also provide a means of direct investment. These debt instruments are issued by private and state-owned enterprises to raise capital. Investing in corporate bonds allows exposure to the financial health and growth of specific industries or companies. Such bonds can be attractive in sectors experiencing rapid expansion, like digital infrastructure or energy. The New Development Bank (NDB), established by BRICS, plans to issue bonds in local currencies, broadening direct investment options.

Common Investment Vehicles for BRICS Exposure

For many investors, gaining exposure to BRICS economies is more practically achieved through pooled investment vehicles rather than direct purchases on foreign exchanges. Exchange-Traded Funds (ETFs) are a widely accessible option, offering diversified exposure to BRICS markets through a single investment. These funds typically hold a basket of stocks and sometimes bonds from BRICS nations, mirroring a specific index. Investors can find broad BRICS ETFs covering multiple countries, or opt for country-specific or sector-specific ETFs. ETFs are traded on stock exchanges like individual stocks, providing liquidity and price transparency throughout the trading day.

Mutual funds provide another avenue for diversified BRICS exposure, especially those focusing on emerging markets or BRICS nations. Unlike ETFs, mutual funds are actively managed by a portfolio manager and are priced once daily at the end of the trading day. These funds often have a broader mandate, investing in a variety of assets including stocks, bonds, and other securities from BRICS countries. While both ETFs and mutual funds offer diversification and professional management, mutual funds generally do not trade intraday and may have different fee structures, including sales loads.

American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) offer a convenient way for U.S. investors to buy shares of foreign companies without directly trading on foreign exchanges. An ADR represents shares of a foreign company held by a U.S. depositary bank, trading on U.S. stock exchanges like the New York Stock Exchange or Nasdaq, or over-the-counter markets. This mechanism allows investors to access shares of companies from BRICS nations, such as major Chinese or Indian corporations, in U.S. dollars and through a domestic brokerage account. GDRs are similar but are issued by a depositary bank in international markets, typically in Europe, making them available globally. Both ADRs and GDRs simplify foreign stock ownership by handling currency conversions and local market complexities.

While less common for the average investor, directly investing in individual stocks or bonds on foreign exchanges is also possible. This approach requires opening an account with a brokerage firm that provides direct access to international markets. Such an endeavor involves navigating different regulatory environments, understanding foreign exchange rates, and dealing with potentially higher transaction costs. Most U.S. investors find pooled investment vehicles, like ETFs and ADRs, more accessible and efficient for gaining exposure to BRICS economies due to their ease of trading and built-in diversification.

Selecting a Brokerage and Account Type

Before investing in BRICS economies, selecting an appropriate brokerage firm is important. Investors should look for a brokerage that offers access to international investments, whether through ETFs, mutual funds, ADRs, or direct foreign stock trading. Key considerations include the availability of desired investment products, the intuitiveness of their trading platforms, the fee structure for international transactions, and the quality of customer support. Some brokerage firms specialize in international trading and provide comprehensive access to global markets, including those in BRICS nations.

Once a brokerage is chosen, investors need to select an account type suitable for their investment goals. Common options include taxable brokerage accounts, Individual Retirement Accounts (IRAs), and Roth IRAs. A taxable brokerage account offers flexibility, allowing investors to deposit and withdraw funds at any time without age restrictions. However, any earnings, dividends, or realized capital gains in these accounts are subject to annual taxation.

Alternatively, tax-advantaged retirement accounts, such as Traditional IRAs and Roth IRAs, can be used for BRICS investments. Traditional IRAs allow for potential tax deductions on contributions, and investments grow tax-deferred until withdrawal in retirement, at which point withdrawals are taxed as ordinary income. Roth IRAs, funded with after-tax dollars, offer tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met. While 401(k) plans are workplace-sponsored retirement accounts, their investment options are limited by the plan administrator, and direct international equity exposure is less common compared to IRAs or taxable accounts.

Opening a brokerage account involves providing personal identification, such as a legal name, current address, and Social Security number or other tax identification. Brokerage firms also request information regarding employment status, income, net worth, and investment objectives to comply with regulatory requirements. The application process can be completed online within a short timeframe, less than 15 minutes.

After the account is approved, the next step is funding it. Investors can deposit funds through various methods, including electronic bank transfers (ACH), wire transfers, or checks. Some brokerages also facilitate direct transfers from other investment accounts.