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Brazil Cuts Inflation Forecast: ETFs in Focus

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On Thursday, June 22, 2017, Brazil’s central bank reiterated that its monetary policy decisions remain dependent on data releases. Hence, there is a cloud of uncertainty around what course the interest rate will take in July. Brazil’s central bank revised its inflation forecasts to 3.8% from 4% for 2017 and 4.5% from 4.6% for 2018.


In its May 31, 2017 meeting, the central bank cut its key benchmark rate for the sixth straight time. It was reduced by 100 basis points to 10.25%, owing to slowing inflation. Consumer Prices in Brazil rose 3.6% year over year in May 2017 compared with a 4.08% in the previous month. The central bank expects inflation to fall to 4.3% by mid 2019, well below its 4.5% target.


The Brazilian economy has been under tremendous pressure owing to the political scandal it faces. In May, Brazil’s President Michel Temer was accused of corruption related charges. Size of rate cuts might get reduced owing to the uncertainty brought by this investigation (read: Brazil ETFs Fall as President Temer Faces Corruption Charges).


Brazil's consumer confidence declined to 100.6 in May 2017 compared with 103.4 in April, while the business confidence index fell to 51.9 in June 2017 compared with 53.7 in May (read: Should You Buy Brazil ETFs After Brutal Sell-Off?).


Let us discuss some ETFs focusing on providing exposure to Brazilian equities (see all Latin America Equity ETFs here).


iShares MSCI Brazil Capped ETF (EWZ - Free Report)


This fund is the most popular ETF providing exposure to Brazilian equities. It focuses on the most liquid companies in the large-cap segment.


It has AUM of $5.33 billion and charges a fee of 63 basis points a year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 35.97%, 16.27% and 11.67% allocation, respectively (as of June 21, 2017). The top three holdings are Itau Unibanco Holding Pref SA, Ambev SA and Banco Bradesco Pref SA with 11.62%, 8.53% and 8.01% allocation, respectively (as of June 21, 2017). The fund has lost 0.72% year to date but returned 20.58% in the last one year (as of June 22, 2017).


First Trust Brazil AlphaDEX Fund (FBZ - Free Report)


This ETF offers a chance to gain exposure to Brazilian equities but is relatively expensive.


It has AUM of $24.52 million and charges a fee of 80 basis points a year. Materials, Financials and Utilities are the top three sectors of this fund with 23.14%, 22.88% and 22.45% allocation, respectively (as of June 21, 2017). The top three holdings for the fund are Fibria Celulose S.A., Vale SA and Itausa-Investimentos with 3.65%, 3.50% and 3.49% allocation, respectively (as of June 21, 2017). The fund has returned 0.79% year to date and 15.58% in the last one year (as of June 22, 2017).


Let us now compare the performance of this fund to a broader Latin American ETF, ILF.


iShares Latin America 40 ETF (ILF - Free Report)


This fund focuses on providing exposure to Latin American equities. It tracks the S&P Latin America 40 Index.


It has AUM of $957.38 million and charges a fee of 49 basis points a year. From a geographical perspective, the fund has top exposures to Brazil, Mexico and Chile, with 54.23%, 28.21% and 10.91% allocation, respectively (as of June 21, 2017). From a sector look, Financials, Consumer Staples and Materials are the top three allocations of the fund, with 34.70%, 16.98% and 15.76% exposure, respectively (as of June 21, 2017). Itau Unibanco Holding ADR, Banco Bradesco ADR Reptg Pref SA and Ambev ADR SA are the top three holdings of the fund, with 8.78%, 6.17% and 6.09% exposure, respectively (as of June 21, 2017). The fund has returned 6.74% year to date and 21.59% in the last one year (as of June 22, 2017).


Below is a chart, comparing the year-to-date performance of the three funds.


 
Source: Yahoo Finance


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