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Brazil Inflation Hits 18-Year Low: ETFs in Focus

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Consumer prices in Brazil increased 2.68% in the year to mid-August 2017 compared with an increase of 2.78% in the year to mid-July. It also came in below a Reuters poll forecast of 2.73%. On a monthly basis it increased 0.35% compared with economists’ expectations of a 0.4% increase.


Brazil’s GDP fell 0.24% sequentially in the second quarter of 2017. On a year-over-year basis it fell 0.30%. 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%. These figures strengthen the odds of a rate hike in the September meeting.


Brazil’s economy has been recovering from a terrible recession, with two consecutive years of negative growth. The economy contracted 3.8% and 3.6% in 2015 and 2016, respectively (read: ETFs in Focus on Growth Forecasts for Latin America).


The Brazilian economy has been going through a rout of political uncertainty as well. The country’s lower house of congress rejected corruption charges against its president Michel Temer, which could have led to his ouster. Consumer confidence in this Latin American nation fell to 99.5 in July 2017 compared with 100.5 in June.


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.


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 $6.32 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 37.09%, 15.24% and 11.32% allocation, respectively (as of August 22, 2017). The top three holdings are Itau Unibanco Holding Pref SA, Banco Bradesco Pref SA and Ambev SA with 11.57%, 8.94% and 8.14% allocation, respectively (as of August 22, 2017). The fund has returned 20.25% year to date and 19.42% in the last one year (as of August 23, 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 $1.11 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 56.10%, 26.74% and 10.66% allocation, respectively (as of August 22, 2017). From a sector look, Financials, Materials and Consumer Staples are the top three allocations of the fund, with 36.02%, 16.19% and 15.95% exposure, respectively (as of August 22, 2017). Itau Unibanco Holding ADR, Banco Bradesco ADR Reptg Pref SA and Vale ADR SA are the top three holdings of the fund, with 9.04%, 7.09% and 6.89% exposure, respectively (as of August 22, 2017). The fund has returned 25.13% year to date and 21.09% in the last one year (as of August 23, 2017).


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


 
Source: Yahoo Finance


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