Market Overview

The Numbers Support Brazil ETFs

The Numbers Support Brazil ETFs

The iShares MSCI Brazil ETF (NYSE: EWZ) is up more than 5 percent year-to-date, putting the largest Brazil exchange traded fund ahead of the MSCI Emerging Markets Index by nearly 400 basis points.

Rising commodities prices and improving economic data are among the catalysts boosting Brazilian stocks this year. The $8.39-billion EWZ follows the MSCI Brazil 25/50 Index and holds 55 stocks from Latin America's largest economy.

“Brazil's private sector economy remained on an upward trajectory in March, rounding off the best quarter since the end of 2013,” Markit said in a recent note. “Both manufacturing production and services activity contributed to the expansion, with the latter lagging the former but showing a welcome turnaround since late last year.”

The Brazilian Financial Sector 

As is the case with many single-country emerging markets ETFs, EWZ is heavily allocated to financial services. The sector represents over 36 percent of the fund's weight, meaning the health of Brazil's banks is integral to EWZ's price action.

Brazil's central bank, which has been trimming interest rates for a while now, recently took additional measures to increase liquidity for Brazilian banks at a time when the country's interest rates are still among the highest of the world's major economies.

“Addressing a longstanding demand from banks, the central bank eased reserve requirements on savings and checking accounts in a move to free up some 25.7 billion reais ($7.7 billion) for new lending,” Reuters reported.

EWZ is highly allocated to cyclical commodities sectors as well, with materials and energy stocks combining for about 28.6 percent of the fund's weight.

Brazilian “goods producers led the first quarter upturn, recording one of the strongest periods of growth seen for over five years. The upswing in output largely reflected robust gains in new work and efforts to rebuild inventories,” according to Markit.

Manufacturers not only reported that underlying domestic demand improved, but also that clients abroad, notably in Mercosur nations, purchased greater quantities of their goods.”

Investors Are Warming Up

Investors are bullish on EWZ and have added $519 million to the fund this year. The cautionary tale is that Brazilian stocks can be volatile. EWZ has a three-year standard deviation of 34.78 percent, more than double that of the MSCI Emerging Markets Index.

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