A New Brazil Rally In ETFs? (EWZ, BRAF, BRF, BRXX, PBR)
The Brazilian BOVESPA Stock Index is on pace for its best one-week performance of 2014 as investors are taking notice of the beaten down country.
A slow grind lower over the last two years has the index down 35 percent from its all-time high set in 2008.
There could be several factors behind the rally that range from buying into an oversold and undervalued nation to the fact the poll numbers are dropping for the current government. One of the country’s largest stocks, Petrobras (NYSE: PBR), which has been entangled in scandals and government issues for years has increased by 11 percent in the last week.
The iShares MSCI Brazil Index ETF (NYSE: EWZ) has gained over six percent in the last week and is breaking out to a two-month high. The ETF is composed of 77 Brazilian stocks with a heavy concentration on the largest companies in the country.
The financials makes up 28 percent, followed by consumer staples at 17 percent and materials at 15 percent. A total of 10 percent of the ETF is invested in PBR and its preferred stock. Over the last 12 months the stock is down 22.5 percent.
See also: 3 ETFs Poised To Bounce
The EG Shares Brazil Infrastructure ETF (NYSE: BRXX) is up five percent this week, but remains lower by 26.5 percent over the last year. The ETF is composed of 30 leading stocks in sectors related to infrastructure. The utilities make up 48 percent of the portfolio, followed by basic materials at 18 percent and telecom at 17 percent.
The ETF only has $34 million in assets and charges an expense ratio of 0.85 percent. One strategy to play the 2014 World Cup soccer championship and the 2016 Summer Olympics, both in Brazil was via BRXX. The reports were that the country would spend up to $1 trillion on upgrading infrastructure. Due to political issues and reports of facilities not on time, the ETF has struggled.
Also up five percent this week is the Market Vectors Brazil Small Cap ETF (NYSE: BRF). The $151 million ETF is along for the ride this week, however over the last year it has lagged its peers with a loss of 32.5 percent. While the small cap stocks have struggled the last year, a rally in the country could see the underperformers lead a potential rally. The key is for BRF to breakout above the $28 area that it has failed at twice in the last two months.
The sector-specific Global X Brazil Financials (NYSE: BRAF) is up seven percent in the past week. The ETF is trading at the best level since mid-January, but remains lower by 26.5 percent over the last 12 months.
The biggest issue with the ETF is that is currently only has $2 million in assets under management and is at risk to close if it does not begin to attract more assets. With only 28 holdings and a focus on a niche sector within an emerging market, the ETF is considered high risk.
The decision an investor must make focuses on whether the current rally in Brazilian stocks is short-term or the beginning of something sustainable.
It is a little early to make that call, however within a week or two the answer should be attainable and investors should be ready to make a move if it appears the ETFs are starting a new uptrend.
Matt McCall is the editor of ETF newsletter MarkETForce available at marketfy.com
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