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Volatility Still The Name Of The Game With Brazil ETFs

ETF Professor

Brazilian stocks are among the more volatile emerging markets fare. The iShares MSCI Brazil ETF (NYSE: EWZ), the largest Brazil exchange traded fund trading in the U.S., has a three-year standard deviation of 31.57 percent compared to just 13 percent on the MSCI Emerging Markets Index.

What Happened

Brazilian stocks and EWZ rallied earlier this year as markets cheered the reform-minded agenda of President Jair Bolsonaro, who was elected last October. Since mid-February, EWZ has seen mostly choppy trading and over the past month, the benchmark Brazil ETF is lower by 6.69 percent as investors have questioned Bolsonaro's ability to reform Brazil's pension system, one of the cornerstones of his campaign.

Bolsonaro's first 100 days in office have been turbulent and his inability to build coalitions within Brazil's congress has some of his marquee legislation stalling as his popularity wanes.

Why It's Important

“Saying Brazil has been volatile over the past three months would be an understatement,” said ETF Action in a Monday note. “Brazil's 30-day volatility is three times that of the global average and well above the second-highest, Mexico. Headlines over the last several weeks range from fraud in the previous administration to pension reform sent country's equity markets on a roller-coaster ride.”

Brazil is the fifth-largest country weight in the MSCI Emerging Markets Index, garnering weight of 6.85 percent in that index.

Of the four major single-country ETFs tracking China, South Korea, Taiwan and India – the country's ahead of Brazil in the MSCI index – all four are beating EWZ on a year-to-date basis. There are six U.S.-listed single-country ETFs dedicated to Latin American economies, including EWZ, and the Brazil fund is the worst-performing member of that group this year.

What's Next

There are still some reasons to be optimistic about Brazilian equities.

“Brazil still maintains the greatest 2019E earnings per share of any country while still trading at discounted multiples versus its three-year average as well as the MSCI All-Country World Index,” said ETF Action. “Brazil ETFs have seen some of the greatest net-inflows of any country over the past six months. With current RSI levels nearing oversold, a near-term opportunity may exist for speculative investors looking to capitalize on the new administration and its plans for reform.”

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