Watch This Brazilian ETF Following The Petrobras Scandal

Brazilian state-run energy giant Petroleo Brasileiro S.A. or

(

), which was expected to release its third-quarter 2014 results on November 14, shocked the investing world by putting off its earnings till December in the wake of a corruption scandal.

Petrobras' high-profile officials are allegedly involved in ‘multi-billion dollar laundering and bribery' charges. This spike in corruption issues took the company's second former executive into custody the day it was slated to report earnings.

Petrobras is the largest publicly traded Latin American oil company, dominating Brazil's oil and gas sector. The company has been headed by president Dilma Rousseff from 2003 to 2010, per

.

Bloomberg also noted that “PwC informed the company last month it wouldn't sign off on results and would alert U.S. authorities if appropriate action wasn't taken to probe the allegations, according to two people with knowledge of the matter.”

If this was not enough, the Brazilian government, the company's majority shareholder, has a history of political interference in Petrobras' affairs. Per that intervention, Petrobras has been asked not to pass on high refining costs to consumers and to ‘

' to rein in inflation.

Bloomberg indicated that Petrobras has the most awful performance among key global oil producers over the trailing four years. The stock lost about 2.5% on November 14 and about 6.2% on November 17. In fact, the stock kept on retreating after hours also. In any case, analysts did not have high hopes on Petrobras earnings.

In the preceding three-month period, Petrobras delivered a negative 25.00% earnings surprise – the third underperformance in the last four quarters – hurt by higher exploration expenses. Moreover, a limit on the prices of domestic refined products, fixed by the government, marred the company's profits considerably.

The stock is the fourth largest holding of the biggest Brazilian ETF

(

) with more than 5.4% share.  Though the fund trimmed its exposure on Petrobras in the recent past, the present weight was also strong enough to have an adverse impact on EWZ. The fund was down more than 0.9% on the same day. On November 17, the ETF lost about 1%.

EWZ is the most popular ETF in the Brazilian equity space with an asset base of more than $5 billion and average trading volume of 30 million shares. It holds a basket of 74 stocks and is quite concentrated in its top five holdings (read:

).

Sector wise, Financials dominates the fund with 31% exposure, followed by Consumer Staples and Materials with 17.86 % and 11.72% allocations, respectively. The fund charges 61 basis points as fees and has lost more than 10% so far this year (read:

).

Though Rousseff has promised to bring about big changes in her second term, it will be interesting to see how things shape up for the Brazil ETFs space.  Undoubtedly, Petrobras will have a strong role in building up the Brazilian economy.

Though things presently seem to be on the downside for both Petrobras and Brazil ETFs, there is one word of solace that

has considered no change in Petrobras' investment grade to reflect this prolonged wait in earnings announcement, as of now.  Whatever the case, we expect the road to be rocky both for the stock and related ETFs in the near term, and especially if PBR misses again.

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