Don't Bet on an Olympics Boost for Brazil ETFs

Brazilian equities have so far staged a huge rally this year on a weakening U.S. dollar, improving commodity prices and renewed confidence in the government after the ouster of President Dilma Rousseff. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), which tracks MSCI Brazil 25/50 index of large- and mid-sized Brazilian companies, has been one of the best performing single-country ETFs of 2016, surging 58.6% year-to-date.

However, if the Olympics shines a spotlight on all the problems Brazil has been tackling with and tourists opted to stay home this time around, investors may consider inverse or bearish ETF options to hedge against a potential pullback. For instance,  ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ) attempts to deliver two times inverse of the daily performance of the MSCI Brazil 25/50 Index.

SEE MORE: Brazil ETFs Strengthen on Realistic Government Guidance

After the Summer Olympics, though, the index of the host country typically outperforms the global benchmark over the next one-year period. Based on recent historical data of the past eight Summer Olympics, the average percentage change of the local index one year after the closing ceremony was 23.8%, compared to the 10.7% change of the MSCI World Index, according to FactSet.

Investors who think they might be able to make a quick buck on Brazil during the Olympic events may be disappointed, especially after the recent run up in valuations.

For more information on the Brazil ETF market, visit our Brazil category.