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Why Brazil ETFs are Gaining despite Economic and Political Risks?

The Brazil stock market has been one of the best performers this month with the benchmark Ibovespa gaining 16% as of March 24, 2016. Several Brazilian ETFs –Shares 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)–have jumped 28.3%, 20.3%, 24.7% and 19%,respectively, in the last 30 days (as of March 24) (read: Catch these Brazil ETFs on a Rebound).
The rally came on the back of speculations regarding a change in government. Brazil has been witnessing a highly charged political drama since the beginning of this month when speculations that President Dilma Rousseff will be impeached were afoot. Even her major coalition partner, the Party of the Brazilian Democratic Movement (PMDB), is working on policies including welfare cuts if the Rousseff government is toppled and it comes to power. Meanwhile, the Brazilian bar association has filed a new request for impeachment proceedings to Congress. Rousseff is under political pressure regarding one of the largest corruption controversies in Brazil. The bribery scandal surrounding Brazil's national petroleum company Petrobras continues to involve several of the country’s politicians.
Investors in favor of a change in government believe that new leadership could be in a better position to revive the battered economy. Apart from that, markets were also buoyed by potential rate cuts by Brazil’s central bank. Although in its meeting earlier in March, the central bank kept the benchmark rate at 14.25%, several analysts believe that it might consider lowering interest rates later in the year. A rate cut could help boost consumer and corporate spending.
Once the star performer of BRIC and emerging markets, Brazil is currently in shambles thanks to economic slowdown and an endless streak of corruption scandals. A new government could infuse a fresh lease of life into the ailing economy which otherwise is expected to contract for the second straight year in 2016. After shrinking 3.9% in 2015, the economy is expected to contract by 3.5% this year. Other worrying factors include an increasing unemployment rate, rising inflation and the currency losing its value (read: Brazil Stocks, ETFs Ignore Slump: Rally on Rousseff Issues).
Although it is questionable how long the rally will continue, a new government might revive the moribund economy. 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).
EWZ in Focus
This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $2.6 billion and average daily volume of more than 20.6 million shares. It 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 35.5%, followed by consumer staples (19.8%), energy (10.3%) and materials (9.6%) (read: Fragile Five ETFs Not At All Fragile This Year?).
BRF in Focus
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 57 small cap stocks and has a total asset base of $76.9 million. The fund trades in average daily volume of 58,000 shares. The fund is well diversified with no stock holding more than 5% of weight. Among the different sectors, consumer discretionary and consumer staples 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. Investors however should invest in small cap companies with caution as these are more volatile than their large cap counterparts.
EWZS in Focus
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 43,000 shares. The fund holds a total of 52 stocks with none holding more than 6.5% weight. Among sectors, the fund has almost 40% of assets invested in consumer discretionary followed by industrials (16%) and financials (13.4%). The fund charges an expense ratio of 64 basis points (read: Emerging Market Crisis: 5 ETFs Down Over 30% in 2015).
BRAZ in Focus
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 fund, through an asset base of $3.3 million, taps 41 stocks. The fund has average daily volume of 1,400 shares. However, BRAZ appears to be highly concentrated in the top 10 holdings with 51% of the assets invested in those securities. Among sectors, the fund has 19% invested in utilities, 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
GLBL-X BRAZL MC (BRAZ): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
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