Rio de Janeiro, Brazil. Shutterstock photo
We are now down to less than a month before the 2016 Summer Olympics in Rio de Janeiro, Brazil kick off on August 5th. As is often the case every four years, many people will be tuning in to the host country’s economic and social aspects as much as the global athletic achievements.
From an investment standpoint, Brazil is considered by many to be an emerging market nation similar to China, India, and Mexico. It is also one of the largest economies in South America. Brazilian stocks make up just over 7% of the broad-based Vanguard FTSE Emerging Market ETF (VWO) and are the fifth largest nation represented in the index.
The largest dedicated exchange-traded fund tracking the Brazilian stock market is the iShares MSCI Brazil Capped ETF (EWZ). This fund offers exposure to 60 large and mid-cap stocks domiciled in the country and currently has $3.5 billion in total assets. The majority of the sector exposure within EWZ is focused on financial, consumer staples, and energy companies.
To say this ETF has undergone a rough stretch might be a bit of an understatement. EWZ has notched average annualized returns of -13.75% over the last five years through June 31. In fact, every single year since 2011 has resulted in a negative total return according to data from iShares.com.
Much of that deterioration has been driven by political, social, and economic upheaval. The decline in commodity prices like oil and gold have weighed heavily on the growth prospects of this emerging market country. Brazil is also besieged by poverty in many of its more populous regions. Furthermore, suspended President of Brazil, Dilma Rousseff, is currently involved in impeachment proceedings for allegedly breaking budget rules.
Yet despite that bleak backdrop, the stock market in Brazil is rapidly surging this year. EWZ has gained nearly 50% since the start of 2016 and just recently hit new year-to-date highs. That’s compared to a more tepid growth of 10% in VWO over the same time frame.
Those gains in Brazilian stocks have been hard fought and have likely been driven in tandem with the rebound in commodity prices and a strengthening currency picture.
The WisdomTree Brazilian Real Strategy Fund (BZF) is a vehicle designed to track changes of the Brazilian Real versus the U.S. dollar. This ETF has surged 28% this year and continues to demonstrate a pattern of gathering momentum.
Currency trends can have a tremendous impact on foreign investment and net returns, particularly when engaged through a vehicle such as a mutual fund or exchange traded fund. Investors have the option of choosing a traditional single-country fund like EWZ or a currency-hedged option such as the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR).
The Bottom Line
Investors may be hesitant to trust the recent jump in Brazilian stock prices after such a sharp rally. The half decade of steep declines and fundamental economic headwinds have left many skeptical about the staying power of this recent move.
Further complicating the landscape is the “hit-or-miss” performance in individual country ETFs versus owning a more broadly diversified regional or international index. Forecasting the trends in specific foreign markets can be difficult and fluctuate year-to-year, similar to individual sector funds.
Nevertheless, there will undeniable interest generated in Brazil as a result of the Olympic games and the fact it’s one of the top performing stock markets of 2016.