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Brazil ETFs Crumble Under Latest Scandal

Cinthia Murphy

So much for forging a bottom in emerging markets.

Brazil, one of the largest developing economies, and the “B” in “BRIC” [Brazil, Russia, India, China], suddenly took a nose dive Thursday following news that its president might be directly involved in an ongoing corruption scandal.

The country’s leading stock market, Bovespa, plummeted some 10% in early trade, extending losses as the morning went on. In the U.S., a fund like the iShares MSCI Brazil Capped ETF (EWZ)—the largest Brazil ETF, with $5.8 billion in assets—was faced with a startling dip in performance, dropping some 16% Thursday morning.

EWZ is now down for the year, as the chart below shows:  

 

 

New Corruption Case

The latest news connects President Michel Temer with an effort to silence a crucial witness in a corruption case. This effort, which allegedly was caught on tape, also involves a key senator that some expected would run for president in the next election.

It’s yet another case of the mighty falling.

Brazil was still healing from a scarring impeachment process that ousted its elected President Dilma Rousseff last summer, and this time, it sent investors running for the doors. A troubled Temer is less likely to effectively implement much-needed reforms the market was looking for.

 

Brazil represents about 8% of the MSCI Emerging Markets Index today, and nearly 9% in the FTSE Emerging Markets benchmark. The country’s pain this morning was weighing on broader emerging market ETFs tracking these indices, including the iShares Core MSCI Emerging Markets ETF (IEMG), the iShares MSCI Emerging Markets ETF (EEM) and the Vanguard FTSE Emerging Markets ETF (VWO). These three ETFs together command some $117.5 billion in assets: 

 

 

Beyond these funds, there are 11 Brazil-focused ETFs on the market today, all of them feeling the pinch of the country’s latest round of corruption allegations involving high-ranking officials.

No ETF was hit harder than the Direxion Daily MSCI Brazil Bull 3X Shares (BRZU), which delivers 3x the daily performance of its underlying index, and has $87 million in assets.

It’s a relatively small fund that Thursday morning was packing a serious punch: BRZU plunged 47% in early trade Thursday—roughly three times the losses EWZ was facing. The decline brought the fund’s year-to-date losses to 11.8%. 

 

Charts courtesy of StockCharts.com

 

For a complete list of all Brazil-focused ETFs, check out our Brazil ETF channel.

Contact Cinthia Murphy at cmurphy@etf.com

 

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