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Catch these Brazil ETFs on a Rebound

With a highly charged political drama in the backdrop, the Brazil stock market has been one of the best performers this year. The benchmark Ibovespa is up 14.5% year to date (as of Mar 11, 2016). This rebound in Brazil after a disappointing 2015 can be attributed to improving commodity prices and a new round of speculations regarding a change in government.
Brazil relies heavily on export to fuel its economic growth. As per data from International Monetary Fund’s World Economic Outlook Database, Brazil’s total Gross Domestic Product amounted to $3.208 trillion in 2015 out of which exports accounted for approximately 6% of the output. The country exports commodities like oil, iron, steel, soy and coffee. With oil prices stabilizing after hitting rock bottom and iron ore and soybean prices up this year, Brazilian exports look poised for a comeback (read: Can Emerging Market ETFs Sustain the Rally?).
Meanwhile, turmoil on the political front continues. Speculations that President Dilma Rousseff will be impeached were afoot after her predecessor and mentor, Luiz Inacio Lula da Silva, was taken into custody for questioning related to a corruption probe. Investors in favor of a change in government believe that new leadership could be in a better position to revive the battered economy.
The Brazilian economy has been bearing the brunt of economic slowdown and an endless streak of corruption scandals for some time now. A new government could infuse a fresh lease of life into the ailing economy which otherwise is expected to contract for a second straight year in 2016. After shrinking 3.9% in 2015, the economy is expected to contract by 3.5% this year (read: Brazil Stocks, ETFs Ignore Slump: Rally on Rousseff Issues).
Apart from that, markets were also buoyed by potential rate cuts by Brazil’s central bank. Although in its meeting earlier this month, the central bank kept the benchmark Selic rate at 14.25%, several analysts are of the view that inflation would peak at around the end of the first quarter, which could lead the central bank to consider lowering interest rates later in the year. A rate cut could help boost consumer and corporate spending and bring cash to equities from safer fixed income alternative.
ETFs in Focus
Even though the Brazilian economy is still in shambles, early signs of a recovery can be seen. In the light of these developments we highlight five ETFs – iShares MSCI Brazil Capped (EWZ), Market Vectors Brazil Small-Cap ETF (BRF), iShares MSCI Brazil Small-Cap (EWZS) and Global X Brazil Mid Cap ETF (BRAZ) – that have jumped 30.8%, 23.9%, 26.9% and 19.6% respectively, in the last 10 days.
So, investors looking to tap into this market could consider the following ETFs in the days to come (see all Latin American Equity ETFs here).
This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $2.5 billion and average daily volume of more than 19.8 million shares. It focuses mostly on large cap stocks and charges 64 bps in fees per year from investors. Holding 61 stocks in its basket, the fund is highly concentrated in its top two holdings with one-fifth of the portfolio invested in them. In terms of industrial exposure, financials dominates the fund’s return at 37.1%, followed by consumer staples (19.4%), energy (10.3%) and materials (10.7%).
This fund provides exposure to the small cap equities of the Brazilian market and tracks the Market Vectors Brazil Small Cap Index. The fund holds a total of 67 small cap stocks and has a total asset base of $77.3 million. The fund trades in average daily volume of 55,000 shares. The fund is well diversified with no stock holding more than 5% of weight. Among the different sectors, consumer cyclical and consumer defensive occupy the top two positions with 42% of investment made in these two categories. Market Vectors Brazil Small-Cap ETF charges a fee of 60 basis points for the investment. Investor should invest in small cap companies with caution as these are more volatile than their large cap counterparts and may prove to be weaker than large cap companies at times of global crisis (read: Best & Worst ETFs of 2015).
Another fund tapping the small cap companies of the Brazilian market is EWZS. The fund seeks to track the MSCI Brazil Small Cap Index. The fund has a total asset base of $19.9 million and trades in average daily volume of almost 49,000 shares. The fund holds a total of 53 stocks with none holding more than 6% weight. Among sectors, the fund has 40.4% of assets invested in consumer discretionary followed by industrials (16%) and finance (13.1%). The fund charges an expense ratio of 64 basis points. (read: Emerging Market Crisis: 5 ETFs Down Over 30% in 2015).
The Brazil Mid Cap ETF has been designed to tap the mid cap market of Brazil. The fund seeks to track the Solactive Brazil Mid Cap Index. The index comprises mid-market capitalization securities of companies that are domiciled or have their main business operations in Brazil. The fund, through an asset base of $3.3 million, taps 41 stocks. The fund has average daily volume of 1,500 shares. However, BRAZ appears to be highly concentrated in the top 10 holdings with 52% of the assets invested in those securities. Among sectors, the fund has 19% invested in basic materials, thereby holding the top position in terms of sector exposure. The investors pay an expense ratio of 69 basis points for the investment made in the fund.
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ISHARS-BRAZIL (EWZ): ETF Research Reports
MKT VEC-BRZL SC (BRF): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
GLBL-X BRAZL MC (BRAZ): ETF Research Reports
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