Brazil ETFs: The World Cup Bounce and Beyondby
If Brazil wins the World Cup, its stock market is likely to share in the glory.
The winning country's stock market outperforms global markets by an average of 3.5 percent in the month after the victory, according to a Goldman Sachs Group Inc. report. Goldman gives Brazil a 48.5 percent probability of winning, followed by Argentina, at 14.1 percent. The report also found that the stock markets of winning countries underperformed by about 4 percent in the 12 months following the win.
So that's the short-term play. The longer-term play takes you deeper into Brazil's volatile political scene. Many citizens are upset with President Dilma Rousseff and the $11 billion spent on preparations for the World Cup despite pressing needs such as health care. Since Rousseff took office on Jan. 1, 2011, the Sao Paulo Stock Exchange index has fallen about 26 percent. ETFs tracking Brazil recently popped on the release of a poll showing Rousseff slumping, on the hope that a new government can boost the economy.
Aggressive investors who believe in Brazil's potential can find 10 exchange-traded funds tracking the country. Here's a look at the largest, best performing and most intriguing of the bunch.
iShares MSCI Brazil Capped ETF (EWZ)
After a tough start to the year, EWZ has surged 18 percent in the past three months for a return of 4 percent year to date. The $4.5 billion ETF tracks 76 local stocks in a variety of sectors, with 30 percent in financials. It's the most traded single-country ETF, with an average $650 million of shares exchanged daily. That's more than Johnson & Johnson (JNJ) trades. It's also the best-performing ETF for the past decade, with a return of 345 percent. It charges 0.61 percent in annual fees, less than the 0.70 percent average for a Brazil ETF. Goldman Sachs is listed as the largest holder of EWZ, with 14.3 percent as of March 31.
Global X Brazil Financials ETF (BRAF)
BRAF is the best-performing Brazil ETF this year by far, up 10 percent. That's thanks to its 40 percent allocation to banks, which have surged as higher interest rates make lending more profitable. A note of caution: It's dicey enough investing in an ETF focused on a single country, let alone one sector within one country. BRAF is about four times as volatile as the S&P 500 Index. It charges 0.77 percent in annual fees and has just $2 million in assets. Any investor daring to use this ETF should rely on limit orders and antacids.
WisdomTree Brazilian Real Strategy Fund (BZF)
BZF is the most intriguing play, with currency one of the main drivers of Brazil's performance this year. BZF is up 8 percent so far this year, more than any other currency ETF. The rally in the currency is being supported by Brazil's moves to stem inflation by raising interest rates. Short-term rates at 11 percent are attractive to foreign investors. BZF has $30 million in assets and charges 0.45 percent.
When investing in Brazil ETFs keep in mind that they may overlap with other emerging markets ETFs. Brazil currently has a 14 percent weight in the $43 billion Vanguard FTSE Emerging Markets ETF (VWO) and an 11 percent weight in the $37 billion iShares MSCI Emerging Markets ETF (EEM). This may be more than enough exposure for people who are happy just keeping a toe in Brazil -- or who just want to watch the World Cup without thinking much about the financial consequences.
More stories from Eric Balchunas:
- The 'Hotel California' Flap: ETF Investors Should Take It Easy
- outperforms global markets
- $11 billion
- about 26 percent
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