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A Brazil ETF That Hedges Against a Depreciating Real

Brazilian stocks are weakening as investors speculate on the potential winding down of monetary stimulus. Nevertheless, Brazil’s market turn around, an equity hedged exchange traded fund can be a better play.

The db X-trackers MSCI Brazil Hedged Equity Fund (DBBR) has dipped 9.6% year-to-date, doing slightly better than the iShares MSCI Brazil Index Fund (EWZ) , which declined 13.8% so far this year.

The db X-tracker is designed to provide exposure to Brazilian equities while mitigating exposure to currency fluctuations in the Brazilian real. In contrast, EWZ does not hedge currency risks, so a weakening real can have a negative effect on the performance of EWZ.

The currency has depreciated from a March 8 high of 1.94 Brazilian reals to the USD to its current price of around 2.15BRL. The WisdomTree Brazillian Real Fund (BZF) is down 7.9% over the past three months. [Another EM Currency Gets Some Relief…Sort Of]

In response to the rapid depreciation in the real, the Brazilian government removed the 6% IOF financial transaction tax on foreign investments into local bonds. [Brazil ETFs Lower After Financial Transaction Tax Removed]

Currently, the real currency is showing greater volatility as uncertainty over the Fed’s quantitative easing program.

“The market is a bit lost,” Gustavo Mendonca, an economist with Saga Capital, said in a Reuters article. “Without any further information on the outlook for the Fed’s stimulus program, we are seeing this volatility.”

Brazilian equities are moving into bear market territory, with the benchmark Ibovespa index down about 21% since this year’s high, Bloomberg reports.

“There’s an indiscriminate selling,” Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, said in the Bloomberg article. “This is a reaction to the excessive optimism created around the Bank of Japan’s announcement and how long the Fed will keep quantitative easing in place.”

For more information on Brazil, visit our Brazil category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.