Bolsonaro's Promised Reforms Bolster Brazilian ETFs

Brazil has reclaimed its mantle of "emerging-market darling" in early 2019, with the country's stock market outperforming those in other developing nations such as China, Mexico and South Korea. Its benchmark, the Bovespa Index (^BVSP), has started the year surging 10.4%.

Reforms and business-friendly rhetoric outlined by Brazil’s newly minted right-wing president Jair Bolsonaro at the Davos World Economic Forum in Switzerland last week has given investors hope that Latin America's largest economy has an administration that intends to turn things around. Bolsonaro, a retired military officer, said he plans to reform Brazil's strickened pension system by increasing the retirement age and rolling back a range of benefits. He also mentioned that he intends to reduce and simplify taxes, privatize state companies and tackle corruption in an attempt to open the country's economy up to foreign investment.

"We enjoy the credibility to carry out reforms that we need and the world expects of us," Bolsonaro told the Davos audience, per Reuters.

Traders who monitor developments in Brazil should keep these three exchange-traded funds (ETFs) on their radar. Let's point out significant technical levels to watch.

iShares MSCI Brazil Capped ETF (EWZ)

Launched back in 2000, the iShares MSCI Brazil Capped ETF (EWZ) seeks to provide similar investment results to the MSCI Brazil 25/50 Index. The fund's portfolio holds Brazilian companies across the broad market cap spectrum, with a 35% tilt toward the financials sector. Its ultra-thin spread of 0.03% and average daily volume of more than 20 million shares per day make it a traders' favorite in the Brazil ETF space. As of Jan. 31, 2019, EWZ offers a 2.88% dividend yield and is up an impressive 13.72% year to date (YTD). The fund has a reasonable 0.59% management fee and controls $7.69 billion in net assets.

EWZ has formed a rising wedge – typically a bearish chart pattern – over the past six months. However, price nudged above the pattern's upper trendline Wednesday, which suggests that bulls want to test 2018 highs. If the fund stalls here, look for a move back down toward the rising wedge's lower trendline, where buyers may step back up to the plate.

Chart depicting the share price of the iShares MSCI Brazil Capped ETF (EWZ)

VanEck Vectors Brazil Small-Cap ETF (BRF)

Created in 2009, the VanEck Vectors Brazil Small-Cap ETF (BRF), with assets under management (AUM) of $88.4 million, aims to provide similar returns to the MVIS Brazil Small-Cap Index. The tracked benchmark, as its name suggests, consists of mostly small-cap Brazilian companies. BRF's basket comprises 60 holdings, with key names including CVC Brasil Operadora e Agencia de Viagens SA (CVCB3.SA), Transmissora Alianca de Energia Eletrica SA (TAEE11.SA) and Companhia de Saneamento do Paraná – SANEPAR (SAPR11.SA). The ETF's spread of 0.60% makes it more suited to swing traders rather than scalpers. With only 26,000 shares changing hands daily, traders must also be mindful of liquidity. BRF charges a 0.60% management fee and has a YTD return of 11.64% as of Jan. 31, 2019.

Like EWZ, the fund's price has traded in an orderly rising wedge formation since mid-September. The 50-day simple moving average (SMA) crossed above the 200-day SMA in December, which technicians refer to as a "golden cross" – a signal that indicates further upside momentum. Yesterday's strong close above the rising wedge pattern may see price run to the February 2018 swing high, although a short-term overbought reading of above 70.0 on the relative strength indicator (RSI) may see the fund fall to the wedge's lower trendline before making a serious upwards push.

Chart depicting the share price of the VanEck Vectors Brazil Small-Cap ETF (BRF)

Direxion Daily MSCI Brazil Bull 3X ETF (BRZU)

The Direxion Daily MSCI Brazil Bull 3X ETF (BRZU), formed in 2013, attempts to return three times the daily performance of the MSCI Brazil 25/50 Index – the same benchmark used by EWZ. This leveraged fund suits those who want to an aggressive short-term play in Brazilian stocks. Its decent exposure to financials ties performance closely with the health of the country's economy. BRZU's 1.15% expense ratio is pricey but shouldn't overly affect traders' bottom line if used for short stays only. More importantly, the ETF's tight spread of 0.10% and ample liquidity keep trading costs low. As of Jan. 31, 2019, the fund, with AUM of $338.06 million and yielding just over 1%, has returned 44.21% YTD.

BRZU's share price poked above the upper trendline of a rising wedge in Wednesday's session. With an RSI reading below 70.0, the bulls may find more room to run before a consolidation period or retracement. If the fund does encounter some selling pressure from the bears, don't be surprised to see it retrace to the rising wedge's lower trendline at $26, where it also finds support from the 200-day SMA.

Chart depicting the share price of the Direxion Daily MSCI Brazil Bull 3X ETF (BRZU)
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