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As Dalio Dances Dangerously With Brazil, Chanos Smiles

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One country, two hedge fund legends -- two starkly different investment viewpoints.

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However, Bridgewater may have reduced its EWZ position in the third quarter, but it did not significantly reduce its exposure to Brazil. That is because the hedge fund boosted its stake in the Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO) by nearly 10.5 million shares during the third quarter to take the firm's interest in the largest emerging markets ETF to almost 49.3 million shares. The firm also added 1.6 million shares of VWO's primary rival, the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM). At the end of the quarter, Bridgewater owned more than 33 million shares of EEM.

EEM and VWO both track the MSCI Emerging Markets Index, which does not exactly skimp on its Brazil exposure. At the end of the September, EEM had an allocation of 12.6% to Brazil, according to iShares data. At the end of October, VWO's weight to the country was 12.5%, according to Vanguard data.

Petrobras and Vale are top-10 holdings in both ETFs. So although Bridgewater pared its exposure to those stocks by parting ways with part of its EWZ position, that trimming was somewhat muted by adding to EEM and VWO.

There is more. In what was one of the biggest ETF stories of the year, Vanguard announced in October that it will drop MSCI indexes on 22 of its ETFs. VWO is one of those funds. Vanguard, the third-largest US ETF sponsor, will transition VWO over to the FTSE Emerging Markets Index next year. The difference between the FTSE and MSCI indexes that the media and many investors have focused on is that MSCI views South Korea as an emerging market while FTSE does not.

Bridgewater, if it was looking to dodge Brazil, should note that VWO's exposure to Brazil will increase when it transitions to the FTSE index. As of the end of October, the FTSE Emerging Markets Index was home to 76 Brazilian stocks and allocated 15.9% of its weight to the country.

At 17.72%, only China has a larger weight than Brazil in the FTSE index. China accounts for 18.5% of the MSCI Emerging Markets Index. The China exposure is important because the country is Brazil's biggest trading partner. It has been weakness, perceived or real, in Chinese commodities demand that has weighed on Vale and other Brazilian materials names this year.

Simply put, Bridgewater reduced its position in EWZ, but by increasing its bets on EEM and VWO, the fund is not skirting Brazil, nor China.

Of course, Chanos is perhaps one of the most noted China bears out there.

Editor's Note: This content was originally published on Benzinga.com by The ETF Professor.

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