Under The Hood: Brazil With A Hedge (EWZ, PBR, DBBR)
For those that didn't get the memo the Brazilian investment thesis and the corresponding ETFs have taken their lumps recently. Part of the reason why is the plunging real. The Brazilian currency as tracked by the WisdomTree Dreyfus Brazilian Real ETF (NYSE: BZF) is looking ugly at the moment.
Still, Brazil holds a lot of allure for a lot of investors even as the central bank is looking to cool demand for the real and the government extended a tax on incoming foreign loans. For those that are still looking to bank on Brazil, it might be wise to do so with a hedge and that can be provided with the db-X MSCI Brazil Currency-Hedged Equity Fund (NYSE: DBBR).
The db-X MSCI Brazil Currency-Hedged Equity Fund was introduced in June 2011 as part of Deutsche Bank's (NYSE: DB) solo foray into U.S.-traded ETFs. The German banking giant had already partnered on nearly 40 funds with PowerShares, the fourth-largest U.S. ETF issuer and DBBR was one of several currency-hedged funds introduced by Deutsche.
DBBR, which has attracted almost $4.9 million in assets under management since its debut, tracks the MSCI Brazil US Dollar Hedged Index. The index is designed to provide exposure to Brazilian equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Brazilian real, according to Deutsche Bank's ETF Web site.
While DBBR is not to be confused with the iShares MSCI Brazil Index Fund (NYSE: EWZ) in terms of AUM or average daily volume, at least not yet, the two funds have identical top-10 holdings. That means large weights to Brazilian oil giant Petrobras (NYSE: PBR) and iron ore producer Vale (NYSE: VALE). EWZ's top-10 holdings account for 55.5% of the fund's weight. With DBBR, those stocks represent about 58% of the fund's total weight.
But when it comes to DBBR, the stock holdings are only part of the equation. Obviously, there's a short real position that needs to be acknowledged as well. The size and value of that position can be found here.
In terms of performance, comparing DBBR to equity-based funds such as EWZ isn't an apples-to-apples to comparison, but if you must know and we admit we were curious as well, EWZ has done a lot better than DBBR's almost 5% year-to-date gain. On the other hand, EWZ and comparable funds have been getting slammed since late February, but over that time horizon, DBBR has been a steady performer.
And in the past month while BZF has plunged more than 4%, DBBR has done its hedging job and gained 1%. The bottom line is an ETF like DBBR can be perceived as complex by ordinary investors and even some pros so in order for it to be successful in gaining assets and volume, it absolutely must deliver on its promise to hedge. DBBR does that, indicating the fund might be worth a look for long-term Brazil bulls and real bears alike.
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