What's Wrong With Brazil ETFs?

by: Gary Gordon

Last October, enthusiasm for Brazil had reached epic proportions. And why not? Not only had the iShares MSCI Brazil Fund (NYSEARCA:EWZ) risen 175% off its November 2008 lows, but the country constitutes one of the essential building blocks in the BRIC (Brazil, Russia, China, India) fortress.

Indeed, the country boasts the world’s seventh largest economy, a consumption-oriented middle class and a treasure trove of natural resources. What’s more, Brazil figures to see a surge in tourism as well as infrastructure commitment due to the 2014 FIFA World Cup and the 2016 Olympics.

So what in the world is wrong with Brazil ETFs? Year-over-year, they’ve experienced some of the harshest capital depreciation in the exchange-traded universe.

Popular Brazil ETFs: 1 Year Underperformance
Approx %
S&P 500 SPDR Trust (NYSEARCA:SPY) 7.4%
WisdomTree Currency Brazilian Real (NYSEARCA:BZF) 3.5%
EGShares Brazil Infrastructure (NYSEARCA:BRXX) -2.2%
Vanguard MSCI Emerging Markets (NYSEARCA:VWO) -7.3%
Global X Brazil Consumer (NYSEARCA:BRAQ) -12.3%
Global X Brazil Mid-Cap (NYSEARCA:BRAZ) -12.5%
Market Vectors Small Cap Brazil (NYSEARCA:BRF) -12.8%
iShares MSCI Brazil (EWZ) -14.0%

The easy argument identifies the slowdown in Europe and the tightening of fiscal/monetary policy in Brazil’s most important trading partner, China. Others have pointed to the possibility that the rise off the 2008 bear’s bottom may have been “too much too fast.”

However, still others are suggesting a far more pessimistic possibility. Extraordinary foreign investment in recent years may have created unintended consequences, from an artificial boost in assets such as real estate to remarkable appreciation in the value of the “real,” Brazil’s currency. In fact, with the Brazilian ”real” so strong, Brazilian factories may be losing the global competitiveness that they had enjoyed over the previous decade.

Consider additional signs of weakness. Brazilian industrial production dropped 1.6% in June from the prior month. The yield curve in Brazil is inverted. And in spite of potential inflationary scenarios, leaders surprised the world with a recent cut in target interest rates.

Nevertheless, with a rate of 12%, there’s a flood of money looking for safer returns in the rapidly-growing economy. Lowering Brazil’s key rate to 12% may not depreciate the Brazilian real enough to keep foreign investors from seeking out that 12%. This might keep the ”real” high and inhibit manufacturers from effectively competing on the world stage.

Still, do not count Brazil out. This is one of the most dynamic economies in the world with some of the best corporations for growth seekers. When the tide turns for emergers ... when risk is genuinely back in vogue ... Brazil should benefit handsomely.