Emerging Markets, Funds / ETFs

Brazil ETF Bumbles Away Most Post-Election Gains

By Todd Shriber

Brazil flagShares of the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) are off nearly 3% Thursday, meaning that as of this writing, only five non-leveraged exchange traded funds are putting in worse intraday performances.

Unfortunately for Brazil bulls, one of the five that is behaving worse than EWZ is theMarket Vectors Brazil Small-Cap ETF (NYSEArca: BRF). Focusing on EWZ, the largest ETF tracking Latin America’s largest economy, Thursday’s slide for the volatile ETF means nearly all of the fund’s post-election gains have evaporated.

On Oct. 26 in the closest Brazilian election in nearly 30 years, President Dilma Rousseff narrowly defeated challenger Senator Aecio Neves in a runoff election. Not surprisingly, EWZ and other Brazil ETFs sank on Monday Oct. 27, but investors seemingly came to grips with the fact that if they wanted to be long Brazilian equities, that commitment would require enduring another term for Rousseff.

Even with the Oct. 27, EWZ would finish that week higher by nearly 10% while BRF tacked on 8.4%. However, momentum has waned for Brazilian stocks since the end of last month, indicating that the thesis that sellers of Brazilian stocks and ETFs were exhausted was flawed.

Last week, investors cheered another rate hike from Brazil’s central bank, which took the country’s benchmark interest rate to 11.25%, one of the highest in the developing world. Today, EWZ and BRF are faltering on reports another rate hike is all but a foregone conclusion.

Global investors are also fretting over Rousseff’s next choice as Brazil’s financial minister. With Neves, investors would have been treated to Arminio Fraga in that role, an alumni of George Soros’ famous Quantum Fund and a former hedge fund manager in his own right. Four years ago, Fraga’s Gavea Investments was acquired by J.P. Morgan Chase (NYSE: JPM). [Risk/Reward With Brazil ETFs]

Of course, Neves lost and investors now must contend with the reality of another for four years of Rousseff, remembering that since she came to power in January 2011, EWZ has lost about 50% of its value. That might be why EWZ is down nearly 6% from last Friday’s intraday high.

Some investors used Rousseff’s reelection as an excuse to part ways with EWZ. Although the ETF has added $332.6 million in new assets since the start of the fourth quarter, since Oct. 27, the day after the election, more than $187 million has been pulled from EWZ.

iShares MSCI Brazil Capped ETF


Courtesy of ETF Trends

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About ETFalpha

Consultant & Founder of ETFalpha ◦ Chief ETF Strategist & Co-Founder of EMerging Equity


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