A day after Standard & Poor’s lowered Brazil’s sovereign debt rating to BBB-, the lowest investment grade, exchange traded funds holding Brazilian debt an equities are holding up pretty well.

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest Brazil ETF by assets, is trading higher by nearly 1%, extending its one-month gain to north of 5%. The Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) is trading modestly higher. BRF, the marquee name among Brazilian small-cap ETFs, is up nearly 6% since the start of February. [Brazil ETFs Deal With Ratings Downgrade]

For now, it appears Brazil ETFs are handling news of the S&P downgrade with aplomb, important considering some investors viewed Tuesday as a test for the recent strength in Brazilian equities.

Tuesday “is a test day for Brazil after the recent strength of that market. The rating agency downgrade yesterday  was a surprise in terms of timing but a further downgrade is now unlikely and the downside for fixed income spreads is limited as they were already pricing in a de-rating of Brazilian debt.The key point is that if Brazilian asset prices are able to respond positively or there is a low volatility reaction today that will be another sign of short-term relief. We are watching Brazilian CDS closely today for the most accurate response to the event,” said Rareview Macro founder Neil Azous in a research note.

Azous notes that risk is rising that either U.S. stocks will start performing “at the market as opposed to the sector or single stock level” and that the downtrodden B, R and C members of the BRIC quartet “begin to perform after extreme negative sentiment and price actions has been discounted.”

Excluding the WisdomTree India Earnings Fund (NYSEArca: EPI), which is up more than 9% year-to-date, the major single-country BRIC ETFs, including EWZ, have disappointed investors this year. However, helped by a resurgent Petrobras (NYSE: PBR) and Vale (NYSEArca: VALE), among others, EWZ has closed the gap and is making a run at turning positive on the year. [Brazil ETFs Tempt]

The question is are investors really warming to the idea of downtrodden emerging markets suddenly becoming better ideas than their developed market counterparts?

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