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Brazil ETFs in Focus as Central Bank Cuts Rates Again

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Despite disappointing economic data and uncertainties stemming from Trump’s triumph in the U.S. elections, Brazil's central bank announced a modest quarter-point cut in its benchmark interest rate, contrary to expectations of a significant cut.

The bank opted for a slow easing cycle and trimmed its Selic rate to 13.75% from 14%. The bank targets to lower inflation to 4.5% in 2017 and 2018 from a near-decade high level earlier this year.

In October, Brazil’s central bank had cut interest rates by 25 basis points for the first time in four years to revive the struggling economy from its deepest recession. Before that the central bank kept the rates on hold as the country battled with a toxic combination of soaring inflation and a shrinking economy (read: 3 Country ETFs Soaring on Hopes of Oil Output Curb).

For the past year, Brazil’s central bank has been forced to keep rates on hold as the country’s economy is in shambles, thanks to broad-based slowdown and an endless streak of corruption scandals, while inflation soared.

In its statement, the bank stated that heightened uncertainty related to U.S. economic policies after Donald Trump became the president-elect could put a halt to the favorable period for emerging markets that saw strong inflows of foreign capital. This year Brazil’s stock market has been one of the best performers with Brazilian ETFs - iShares MSCI Brazil Capped ETF (EWZ - Free Report) , VanEck Vectors Brazil Small-Cap ETF (BRF - Free Report) and iShares MSCI Brazil Small-Cap ETF (EWZS - Free Report) – jumped 63.1%, 54.5% and 64.7% respectively, in the year- to-date period (read: Can Brazil ETFs Keep Up Their Amazing Run?).

Economic data was also disappointing. As per statistics agency IBGE, economic output shrank 0.8% in the third quarter sequentially. Additionally, investments, production and consumption all contracted in the quarter.

In this scenario the following ETFs could be on investor’s radar (see all Latin American Equity ETFs here).

EWZ in Focus

This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $4 billion and average daily volume of more than 21 million shares. It charges 62 bps in fees per year from investors. Holding 61 stocks in its basket, the fund is highly concentrated in its top three holdings with one-fourth of the portfolio invested in them. In terms of industrial exposure, financials dominates the fund’s return at 35.5%, followed by consumer staples (16.2%), energy (13.2%) and materials (12.6%) (read: Top ETF Stories of October).

BRF in Focus

This fund provides exposure to the small cap equities of the Brazilian market and tracks the MVIS Brazil Small-Cap Index. The fund holds a total of 57 small cap stocks and has a total asset base of $92.1 million. The fund trades in average daily volume of 67,000 shares. The fund is well diversified with no stock holding more than 4.5% of weight. Among the different sectors, consumer discretionary and consumer staples occupy the top two positions with 41% of the investment made in these two categories. The ETF charges a fee of 60 basis points. Investor should invest in small cap companies with caution as these are more volatile than their large cap counterparts.

EWZS in Focus

Another fund tapping the small cap companies of the Brazilian market is EWZS. The fund seeks to track the MSCI Brazil Small Cap Index. The fund has a total asset base of $42 million and trades in average daily volume of almost 50,000 shares. The fund holds a total of 52 stocks with none holding more than 6.1% weight. Among sectors, the fund has almost 41% of the assets invested in consumer discretionary, followed by materials (13.5%) and financials (11.1%). The fund charges an expense ratio of 62 basis points (read: Should You Buy Brazil ETFs Post Rio Olympics?).

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