Once again we are discussing Brazil, and once again it involves sagging performance in the benchmark ETF EWZ (iShares MSCI Brazil, Expense Ratio 0.62%), which year to date has seen more than $800 million leave the fund via redemption activity.
The fund’s asset base is now currently about $2.3 billion, still giving it a gigantic lead over the next largest fund in the “Brazil Equity” segment, which is BRF (Market Vectors Brazil Small Cap, Expense Ratio 0.60%) which only has $80.5 million in assets under management.
EWZ has severely lagged a broader benchmark EEM (iShares MSCI Emerging Markets, Expense Ratio 0.67%), down more than 21% year to date compared to EEM’s 6.33% loss. Brazil as a single country holding carries a 7% weighting within the MSCI Emerging Markets Index, and ranks as its sixth largest holding.
The local market has had an abominable July thus far, down nearly 12% in July alone, including a big bounce yesterday after briefly breaching the $28 handle and trading as low as $27.53 on an intraday basis on gigantic trading volume.
Today, EWZ is up approximately 1% and attempting to claw its way back to $29, but it is still notably lower than its 50 day MA which is well overhead at $32.22 and a level that it has failed at several times since May.
We do not expect the trading interest and volatility in Brazil to abate any time soon as just this morning we see a headline in regards to the recent “Negative Outlook” that S&P has on the Brazilian economy, hinting that a further downgrade may relegate Brazilian debt into the dreaded “Junk” category. For an Emerging economy that formerly had a great deal of respectability, having sponsored the World Cup just last year in 2014 for example, this has to be concerning to anyone investing in the country and or companies domiciled there.
The tanking of Oil prices in July, not counting yesterday’s rally, have certainly not helped Brazil being a producer of the commodity, and one can see the heavy correlation between Oil prices and Brazilian equities not just in the past month but in the year to date, as well as trailing one year periods and it has simply been a bloodbath.
Contrarians here looking to embrace a potential reversal on the long side may look to the under-covered BRZU (Direxion Daily Brazil Bull 3X, Expense Ratio 0.95%) which has only $38 million in assets under management but from time to time (like the past week or so) sees huge vaults in its daily trading volume relative to the norms.
iShares MSCI Brazil Capped ETF
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