Back to top

ETF News And Commentary

Brazil was once the South American star performer, but over the past two years, the economy has been suffering from slower growth and heightened inflation. With these twin attacks, Brazil is currently one of the weakest performing nations among the four BRIC (Brazil, Russia, India and China) countries (read: Three Country ETFs Struggling in 2013).

Inside the Slump: Credit Outlook Downgrade

Part of the reason for this slump is due to an S&P downgrade of the nation’s credit rating outlook to negative from stable. This was largely due to sluggish economic growth prospects and an expansionary fiscal policy, which the rating agency believes are likely to raise the government debt burden.

This move is also a threat to the decade long streak of rating upgrades for the biggest country in Latin America, possibly suggesting that the country may be nearing its peak.

Rate Hikes

Beyond the downgrade, there have also been some interesting developments on the central bank front as the country recently raised rates. This is quite surprising as the nation is one of the only ones to take a hawkish stance as much of the developing world like Europe, Australia, and South Korea, and major emerging countries such as India, Thailand and Turkey are lowering their borrowing cost to boost economic growth (read: 3 Emerging Market ETFs Still Going Strong).

The central bank of Brazil increased the benchmark interest rate by 50 bps to 8% in order to pull back the inflation rate that is stalling economic growth. High inflation remains a matter of huge concern for the nation.

Inflation currently stands at 6.49%, which is very close to the 6.5% ceiling of the nation's inflation-targeting band. However, many fear that a rise in the rate would bring a stage of stagflation in the short term.

Other Concerns

This is not the only worry for the country by any means. The Brazilian real has depreciated by 8.9% against the dollar in the trailing three-month period, further adding to the country’s woes. This marks the biggest drop among 16 major currencies and signals bearish growth prospects for the nation.

In addition to rising rates and inflation, tension has started to mount regarding unemployment and the country’s ability to host the 2014 World Cup. Unemployment in Brazil rose to 5.8% in April from 5.7% in March, indicating pressure in the labor market (read: Brazil ETFs in Trouble?).

The S&P warned that rising inflationary pressure, increasing debt burden and a worsening fiscal situation may compel yet another downgrade in the next two years. The rating agency expects the country’s GDP to grow a modest 2.5% this year after growing 2.7% in 2011 and 0.9% in 2012.

This lackluster growth along with declining private sector investment and deterioration in the government’s credibility could result in higher public debt in the next three years.

Impact on ETFs

The news of the downgrade by the S&P has crushed the Brazil ETFs overall. The ultra-popular MSCI Brazil Index Fund (EWZ - ETF report), which tracks the MSCI Brazil 25/50 Index, is now down 11.9% in the past month, slumping far more than U.S. markets in the time frame. .

With holdings of 82 securities in total, the product charges 60 bps in fees and expenses. The ETF focuses on the large cap segment that accounts for 84% of EWZ, while mid cap takes the remaining portion. The fund has amassed $6.3 billion in total assets while lost roughly 15% in the year-to-date time frame (read: Is It Time to Buy the Brazil ETF (EWZ - ETF report)?).

The EG Shares Brazil Infrastructure Index ETF (BRXX - ETF report) has lost about 10.2% in the last month, pacing its large cap counterpart’s performance. The ETF tracks the Indxx Brazil Infrastructure Index and holds 30 securities in its portfolio. Utilities take the top spot with one-third share closely followed by industrials, telecommunications, basic materials and financials. The fund has $68 million in AUM and charges investors a higher annual fee of 85 bps.

The two popular small cap funds recorded the largest declines, both immediately following the S&P report, and in the past month. The iShares MSCI Brazil Small Cap Index (EWZS - ETF report) was down 2.54% followed by Market Vectors Brazil Small-Cap ETF (BRF - ETF report) which lost 2.38%, while the funds lost double digits in the last one month time period. 

EWZS tracks the MSCI Brazil Small Cap Index, holding 85 stocks while BRF tracks the Market Vectors Brazil Small-Cap Index, holding 74 securities. Both charge a fee of 60 bps a year from investors (see more in the Zacks ETF Center).

The other unleveraged Brazil ETFs – Global X Brazil Consumer ETF (BRAQ), db X-trackers MSCI Brazil Hedged Equity Fund (DBBR), First Trust Brazil AlphaDEX Fund (FBZ) and Global X Brazil Financials ETF (BRAF) were also down 1.68%, 1.92%, 0.73% and 2.02%, respectively, on the day. These have also largely seen the same level of declines over the past month too, suggesting that Brazil is facing some severe weakness and could encounter more trouble in the months ahead as well.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Please login to Zacks.com or register to post a comment.

If you wish to go to ZacksFunds.com, click OK. If you do not, click Cancel.

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
TRIQUINT SE… TQNT 20.67 +6.52%
RF MICRO DE… RFMD 12.47 +6.04%
VASCO DATA… VDSI 14.77 +4.68%
STRATTEC SE… STRT 80.24 +3.00%
PATTERSON-U… PTEN 34.54 +2.98%