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Brazil ETFs: Close to Attractive, But…


Exchange traded funds tracking Brazil, Latin America’s largest economy, have disappointments for a while now. The iShares MSCI Brazil Capped ETF (EWZ) , the largest Brazil ETF by assets, has endured the brunt of investors’ waning enthusiasm for the once beloved emerging market.

In 2013, EWZ was the worst of the four major BRIC ETFs while noticeably lagging the Global X FTSE Colombia 20 ETF (GXG) and the iShares MSCI Mexico Capped ETF (EWW) .

Already grappling with the effects of slumping commodities demand and a weak real, the country said its current account deficit grew to $8.7 billion in December from $5.1 billion in November. Economists expected a deficit of $6.8 billion. Brazil’s current account deficit is the result of a tumbling real, which the country’s central bank has proven impotent in defending despite a plethora of interest rate hikes. [Brazil ETFs Trying to Break Declines]

Petrobras (PBR), Brazil’s state-run oil company and almost 10% of EWZ’s weight, is trading at levels not seen since mid-2005. If there is a silver lining with Brazil ETFs, including EWZ, it is arguably twofold. First, bad news pertaining to the economy is well documented. Second, Brazilian stocks, like many in the developing world, are becoming attractive on valuation. [Petrobras Plagues Brazil ETFs]

“The good news is that such a decline in the real will make Brazilian assets cheaper for USD-domiciled investors. If we map three-month-ahead Brazilian relative performance vis-a-vis the US as a function of the excess carry return into the BRL and three-month Brazilian rates, we see how a continued decline in the BRL will push relative performance into a zone of green bubbles,” according to Howard Simmons for Minyanville.

Regarding Brazilian debt, although credit agencies have lowered their outlooks, Standard & Poor’s told Reuters this week that it is unlikely that Brazil’s sovereign rating will move to junk status in the event of a downgrade. S&P currently rates Brazil BBB.

The Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) has an almost 10% weight to real-denominated debt, making Brazil the ETF’s second-largest country weight behind Poland. EMLC has a yield to worst of 6.17% and an effective duration of 4.46 years, according to Market Vectors data.

Perhaps it is still too early to get truly excited about Brazil ETFs, particularly with EWZ 11.4% below its 200-day moving average, but EMLC and the Emerging  Markets Aggregate Bond ETF (NYSEArca: EMAG) are each up at least 2.5% this month. EMAG also features a nearly 10% weight to Brazilian debt, some of which is dollar denominated.

iShares MSCI Brazil Capped ETF