Now This for Brazil ETFs: IG Rating is Vulnerable

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).