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Comfortable Escape for Brazilian President: ETFs in Focus

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Brazil’s lower house of congress rejected corruption charges against the country’s president Michel Temer, which could have led to his ouster. Michel Temer needed at least 172 votes to escape a Supreme Court trial. Finally, he secured the support of 263 lawmakers, while 227 voted against him and 23 were in abstention.


Temer had been accused of accepting a $152,000 bribe from JBS SA, the world’s biggest meat packer, in return for political favors. However, in a corruption-plagued government fraught with uncertainty, Temer’s proponents cited consistent political upheaval as terrible for the economy. This is likely to instill confidence amongst investors as they hope for a possible stability in the economy (read: Brazil Growth Outlook Worsens: ETFs in Focus).


Despite having one of the lowest approval ratings for a President (5% the week before the vote), Temer managed to stay in power due to Congressional support. The market will now be expecting Temer to go ahead with his fiscal reform agenda, talks on which had been stalled owing to the uncertainty around his future as President. Right now, pension reform tops Temer’s agenda, as he targets to narrow the huge budget deficit of Brazil.


Brazil’s GDP fell 0.4% year over year in the first quarter of 2017. Consumer prices in Brazil grew 3% year over year in June 2017 compared with 3.6% in the previous month. Moreover, the central bank cut its key benchmark rate in July for the seventh time since October 2016. It was reduced by 100 basis points to 9.25%.


Consumer confidence in this Latin American nation fell to 99.5 in July 2017 compared with 100.5 in June.


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 $6.12 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 36.64%, 15.55% and 11.57% allocation, respectively (as of August 2, 2017). The top three holdings are Itau Unibanco Holding Pref SA, Banco Bradesco Pref SA and Ambev SA with 11.60%, 8.61% and 8.33% allocation, respectively (as of August 2, 2017). The fund has returned 15.6% year to date and 14.16% in the last one year (as of August 2, 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 $25.08 million and charges a fee of 80 basis points a year. Utilities, Financials and Materials are the top three sectors of this fund with 18.95%, 16.85% and 15.19% allocation, respectively (as of August 1, 2017). The top three holdings for the fund are Magazine Luiza S.A., JBS SA and Localiza Rent a Car S.A with 4.34%, 3.53% and 3.46% allocation, respectively (as of August 1, 2017). The fund has returned 15.36% year to date and 12.72% in the last one year (as of August 2, 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 $1.03 billion 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 56.21%, 26.80% and 10.67% allocation, respectively (as of August 2, 2017). From a sector look, Financials, Materials and Consumer Staples are the top three allocations of the fund, with 35.41%, 16.47% and 16.09% exposure, respectively (as of August 2, 2017). Itau Unibanco Holding ADR, Banco Bradesco ADR Reptg Pref SA and Ambev ADR SA are the top three holdings of the fund, with 9.07%, 6.84% and 6.14% exposure, respectively (as of August 2, 2017). The fund has returned 21.10% year to date and 18.82% in the last one year (as of August 2, 2017).


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


 
Source: Yahoo Finance


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