ETF Trends
ETF Trends

Shares of the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) are lower by nearly 2% Friday after Jefferies said Latin America’s largest economy is vulnerable to losing its investment-grade sovereign credit.

“”It will be difficult to maintain the investment-grade rating even under best case scenario,” says Siobhan Morden, head of Latin America strategy at Jefferies,” according to a blurb on Seeking Alpha.

With Friday’s loss, EWZ, the largest Brazil ETF, has given up all of its post-election gains and then some. The ETF surged about 9% from Oct. 27, the day after President Dilma Rousseff defeated challenger Aecio Neves in a runoff election, through Oct. 31. Since Oct. 31, however, EWZ is of 9.9%, putting the ETF dangerously close to the 10% decline necessary to mark an official correction. [Brazil ETFs Give up Most Post-Election Gains]

Jefferies said Brazil could lose its investment-grade rating in two to three years. In March, Standard & Poor’s lowered Brazil’s sovereign debt rating to BBB-, the lowest investment grade. At that time, market observers viewed a downgrade of Brazil to junk status as unlikely. [Brazil ETFs Endure S&P Downgrade]

The specter of a credit downgrade is plaguing several ETFs beyond EWZ today. Four of the five worst-performing ETFs to this point in Friday’s session are Brazil ETFs or funds with significant exposure to the country. EWZ is today’s second-worst performer among non-leveraged ETFs behind the Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF).

Investors are jittery regarding Rousseff’s choice, which has yet to be made official, to replace Finance Minister Guido Mantega. Former central bank chief Henrique Meirelles is seen as a leading candidate, but any of Rousseff’s choices are likely to be viewed as a letdown by investors because Neves promised a far more compelling finance minister.

Had Neves won, he would have made Arminio Fraga Brazil’s next finance minister. That served as one of the primary reasons why EWZ and other Brazil ETFs rallied leading up to the runoff election.

Aside from holding a degree of Princeton, Fraga is an alumni of George Soros’ famous Quantum Fund and a former hedge fund manager in his own right. Four years ago, Fraga’s Gavea Investments was acquired by J.P. Morgan Chase (NYSE: JPM). That pedigree is hard to match within developed markets, let alone by any of Rousseff’s candidates for the finance minister post.

iShares MSCI Brazil Capped ETF