Banks Don't Need to be a Drag on Brazil ETFs

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, was one of 2016’s best-performing single-country emerging markets ETFs. Making the strength of Brazilian stocks last year all the more impressive was that those bullish performances were notched in the face of lingering concerns about Brazilian banks.

That issue is particularly relevant for EWZ because the ETF allocates 36% of its weight to financial services stocks, more than double its second-largest sector weight, consumer staples.

Brazil’s central bank could be of assistance with more interest rate cuts, something that happened twice in the latter stages of 2016.

Brazil’s central bank has not hiked interest rates since last year. Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks.