The 2014 World Cup of soccer has turned more than the eyes of soccer fans toward Brazil. Based recent price swings, traders and investors are also finding themselves intrigued by the dynamic nation. Brazil is the largest economy in South America with GDP of nearly $2.4 trillion (estimated as of 2012). As the media has clearly shown over the past week, no nation is free from problems. Brazil is still balancing economic growth with social issues, such as urban and rural poverty, crime, violence and drugs. Despite its internal struggles, the global nature of the financial markets makes Brazil one of the most intriguing nations for investment. In this article, we’ll take a look at many ETFs that retail traders can use to gain exposure to various segments of Brazil. (For further reading, see: Investing in Brazil 101)
The Brazilian Stock Market - BM&F Bovespa
The BM&F Bovespa, located in São Paulo, has a market capitalization of more than $1.22 trillion making it the 13th-largest stock exchange in the world. As you can see from the chart below, the Bovespa index reached its highest level in more than seven months on increasing speculation that President Dilma Rousseff is losing ground in polls for the country’s upcoming election. The recent bullish crossover between the 50-day and 200-day moving average suggests that the long-term trend in Brazilian assets is turning upward. Notice how the 200-day moving average has been acting as a strong level of resistance since late March. Investors and traders will likely continue to hold a bullish outlook on Brazil until this main index closes below 51,226.
Looking at the Large Caps
The strength of any nation’s economy can be found by analyzing the shares of its large-cap companies. Such companies offer tremendous diversification and scale, and are usually a great starting point for any investor or trader looking to invest in a relatively unknown area of the world. The most popular ETF for buying into Brazilian large caps is the iShares MSCI Brazil Capped ETF (EWZ). This fund as total net assets of nearly $5 billion and holds positions in 76 of the nation’s largest companies. The fee-conscious traders out there will be happy to learn that this fund carries a respectable expense ratio of 0.61%. (For more, see: It’s Time To Invest In Brazil)
For The Risk Takers: Small and Mid-Cap Stocks
Traders looking who are looking to take on more risk, there are several interesting ETFs that cover Brazilian small and mid-cap stocks - the Global X Brazil Mid Cap ETF (BRAZ), iShares MSCI Brazil Small-Cap ETF (EWZS) and the Market Vectors Brazil Small-Cap ETF (BRF). The riskier nature of small-cap stocks means that these ETFs are much more thinly traded than their large-cap counterparts so these funds should only be traded by those with experience. (For related reading, see: Is There Any Samba Left In Brazil's Stocks)
From a technical perspective, the recent crossover between the 50 and 200-day moving averages suggest that the long-term trend is now been confirmed to be in the upward direction. Increased money flow into Brazil will likely significantly benefit this group of stocks. The nearby averages provide and interesting risk/reward scenario and it wouldn’t be surprising to see traders set their stop-losses directly below $29.72 (red line).
Brazil Sector ETFs
If a trader wanted to only increase their exposure to a certain sector of Brazil rather than the entire market it's possible to do so with various ETFs. A few ETFs that fit the bill are the EGShares Brazil Infrastructure ETF (BRXX), Global X Brazil Financials ETF (BRAF) and the Global X Brazil Consumer ETF (BRAQ). These ETFs are still developing and don’t quite have the following as the broader market ETFs mentioned above so proceed with caution. It's not uncommon for some of these funds to only trade a few thousand shares per day, which means it can often be difficult to enter or exit a position without proper planning. There is no dispute that these ETFs are not for everyone, but they could be a wise choice for the strategic trader.
The Bottom Line
The World Cup has sparked renewed interest about Brazil among traders. As stated above, there are many different ETFs available for retail traders looking to buy into this dynamic country. While the ETFs mentioned in this article are a good starting point, you’ll find with a little research there are other interesting picks that should not be ignored. (For more, see: An Evaluation of Emerging Markets)