There was a time when it was believed by many that Brazil
would play a major role in a global economic recovery, and
definitely drive South America higher. But this conviction took a
beating with this emerging economy buckling under dual pressure
of slower growth and heightened inflation.
While inflation stands at
in June 2013, many fear a stage of stagflation in the short term.
Additionally, Brazil's equity market has underperformed over the
last two and half years, leaving many gloomy over the nation's
What Happened in Brazil?
Slower growth and higher inflation generally result in an
strange situation in which measures adopted to tame inflation
will halt growth and vice versa. In Brazil's case, this is what
Inflation is now above the ceiling of the nation's
inflation-targeting band, forcing policy actions to curtail price
increases. To chase inflation, the nation's central bank hiked
their important Selic rate by 50 bps to 8%, likely hurting growth
in the process.
While much of the developing world like Europe, Australia, and
South Korea, and major emerging countries such as India, Thailand
and Turkey are cutting rates to trigger economic growth ,
Brazil's step came as an utter shock (read:
3 Emerging Market ETFs Still Going Strong
Secondly, the credit worthiness of Brazil has also been
wobbling. The country's government debt/GDP and interest
payments/revenue ratios have been increasing. An easy fiscal and
monetary policy has continuously pressurized the government's
Following such a concern, S&P downgraded the nation's
credit rating outlook to negative from stable in June 2013. The
S&P has also warned that rising inflationary pressure,
increasing debt burden and a worsening fiscal situation may
compel yet another downgrade in the next two years. The rating
agency expects the country's GDP to grow a modest 2.5% this year
after growing 2.7% in 2011 and 0.9% in 2012.
Thirdly, the Brazilian real has been losing strength, further
adding to the country's woes. In early July, the Brazilian real
marked its biggest drop against the dollar in more than four
years. The real has
depreciated more than 10%
against the dollar since the beginning of the year (Read:
Forget Brazil ETFs, Focus on This Top Ranked Fund
If these factors were not enough, huge social unrest owing to
some austerity measures implemented in the country raises serious
concern among investors. This is especially true as Brazil is
hosting FIFA World Cup in 2014 and the Summer Olympics in
Both the national efforts demand huge investments towards
infrastructure development, blowing up budgetary concerns (Read
: Brazil ETFs Surge, But Can It Last?
). On account of their worries, Brazilians have since been
protesting across the nation, further adding to concerns over
stability in the country.
Following a host of bad news on Brazil, The ultra-popular
MSCI Brazil Index Fund
) lost 22% in the first seven months of the year. The relatively
Market Vectors Brazil Small-Cap ETF
iShares MSCI Brazil Small Cap Index
) shed 27% and 24% respectively in the said
We are maintaining our sell recommendation on most Brazil
. As a result, investors who are bearish on Brazil right now,
definitely for a valid reason, may consider a near-term short on
Fortunately, ETFs offer several options to investors to
accomplish this task. Below, we highlight a few of the options in
the inverse ETF space. These ETFs make a profit when the
Brazilian stocks decline and are suitable for hedging purposes
against the fall of these stocks (Read:
Guide to the 10 Most Popular Leveraged Inverse
Direxion Daily Brazil Bear 3X Shares
This leveraged ETF was launched in May this year by Direxion
which is a key player in the leveraged and inverse leveraged ETF
Direxion Launches 2 Leveraged Bear ETFs
This new ETF seeks to triple the inverse performance of the
MSCI Brazil 25/50 Index on a daily basis. The approach results in
a focus on mid and large cap Brazilian companies.
The product has amassed over $3.3 million in AUM while volume
is light (nearly 3,000 shares), suggesting additional potential
costs in the form of wide bid/ask spread beyond the expense ratio
In terms of holdings, financials takes the top spot,
comprising nearly 28% of the total. Beyond that, three more
sectors have double digit allocations including consumer staples,
materials and energy.
The return from BRZS skyrocketed 64.7% since its inception and
investors could book more profits off this fund if Brazil
continues to struggle.
ProShares UltraShort MSCI Brazil Capped
The fund seeks to deliver twice (2x or 200%) the inverse
return of the daily performance of the MSCI Brazil Index. This
benchmark holds about 79 stocks in its basket, spreading out
exposure quite nicely among the various sub-sectors. Here also,
financials are given the top priority with about 27% exposure
followed by Consumer Non-cyclical (24.4%), Basic Materials
(16.6%), and Energy (11.5%).
The product has $15.9 million in AUM and average trading
volume of nearly 4,000 shares per day. This product also charges
95 basis points a year in fees, putting it in line with others in
the space. However, contrary to BRZS, this fund is mainly focused
to large caps (see more in the
The fund was one of the best bearish emerging markets ETFs in
the second quarter. The fund has also returned a gigantic 52.2%
so far this year.
While both BRZS and BZQ could be enticing options to play the
downtrend in Brazil, BRZS could be more volatile than BZQ due to
the former's higher exposure to mid and small caps securities as
well as triple leverage strategy. Hence, BRZS might see big
swings in a short time period.
Also, the daily rebalancing nature of both the ETFs may lead
to returns that are not close to the expected long-term
performance figures. Thus, these funds should be exclusively used
by short term traders, though returns could be great for these
products if bearish trends continue in Brazil.
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MKT VEC-BRZL SC (BRF): ETF Research Reports
DIR-D BRZL BR3X (BRZS): ETF Research Reports
PRO-ULS MSCI BR (BZQ): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
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