Brazil ETFs Jump as Senate Approves Pension Reform

Reforms expected to save $195 billion over the next decade

Brazilian stocks have traded 25% higher since far-right leader Jair Bolsonaro was elected president on Oct. 28, 2018, and vowed to stabilize the country's public finances and restore business confidence. After trading sideways for several months, Brazil's benchmark Bovespa stock index surged 1.28% Tuesday on news that the Senate had approved major reforms to the nation's pension system.

The bill, which sees voting on the final four amendments today, intends to save 800 billion Brazilian reais, or $195 billion, over the next 10 years through measures including raising the minimum retirement age and upping workers' pension contributions. As well as structural reform, record-low interest rates continue to underpin Brazilian equities, with the country's central bank expected to slash interest rates from 4.75% to 4.5% by the end of this year to combat a slower-than-expected recovery and stagnant inflation.

"There is supposed to be some economic reforms coming up which might be seen as a short-term catalyst for the country," Mohit Bajaj, a director at WallachBeth Capital, told Bloomberg. "For a short-term play, I like the country, especially if interest rates decline to spur growth. But only as a tactical play rather than a long-term hold going into year-end," Bajaj added.

Traders who want to play Brazilian stocks can gain cost-effective exposure to the nation's stock market using these three exchange-traded funds (ETFs). Let's review the metrics of each fund and explore several trading ideas.

iShares MSCI Brazil Capped ETF (EWZ)

Launched in 2000, the iShares MSCI Brazil Capped ETF (EWZ) aims to deliver similar returns to the MSCI Brazil 25/50 Index – a benchmark comprising Brazilian stocks that primarily trade on the São Paolo Stock Exchange, also known as the Bovespa or B3. The fund takes a substantial tilt toward financials, allocating roughly 35% of its assets to the interest rate-sensitive sector. Key stocks in the ETF's portfolio of 56 holdings include financial services firm Itau Unibanco Holding S.A. (ITUB), multinational mining giant Vale S.A. (VALE), and Brazil's largest private bank Banco Bradesco S.A. (BBD). Daily turnover of more than 20 million shares, coupled with an average penny spread, makes the fund a trader's favorite in the segment. EWZ controls assets under management (AUM) of $8.41 billion, charges a 0.59% management fee, and has added 13.47% year to date (YTD) as of Oct. 23, 2019. Investors also receive a 2.64% dividend yield.

The fund's share price trended sharply higher between May and July before giving back most of those gains over the next two months. Since August, the ETF has traded within a symmetrical triangle as investors waited for further information about policy direction. The bulls finally showed their hand in Tuesday's trading session, pushing the price above the pattern's top trendline on reasonable volume. Those who play the breakout should set a take-profit order near the July swing high at the $47 level and limit downside with a stop placed underneath either yesterday's low or Monday's low, depending on risk tolerance.

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

Direxion Daily MSCI Brazil Bull 3X Shares (BRZU)

Those who want a more aggressive bet on Brazilan stocks should consider trading the Direxion Daily MSCI Brazil Bull 3X Shares (BRZU). The $424.09 million fund tracks the same index as EWZ but seeks to return three times the daily performance of the benchmark. Traders should note that, due to the ETF's daily reset mechanism, returns for longer holding periods may deviate from the advertised leverage. A 0.05% average spread along with almost $60 million in dollar volume liquidity most days facilitates use with short-term tactical strategies. As of Oct. 23, 2019, BRZU has an expense ratio of 1.36%, yields 1.26%, and is up 14.12% so far this year.

A similar technical picture to that of EWZ appears on BRZU's chart. Yesterday's breakout above a classic symmetrical triangle on above-average volume indicates that buyers have taken control of price action and seem intent on testing $40 – an area where the prominent February and July swing highs may provide significant overhead resistance. The relative strength index (RSI) gives a reading below overbought levels, allowing the price ample room to move higher before consolidating. Traders should mitigate risk by positioning a stop-loss order somewhere below $28.

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

VanEck Vectors Brazil Small-Cap ETF (BRF)

With net assets of $85 million and issuing an attractive 2.48% dividend yield, the VanEck Vectors Brazil Small-Cap ETF (BRF) has an objective to provide investment results that correspond to the MVIS Brazil Small-Cap Index. As its name suggests, the underlying index consists of Brazilian small-cap companies. The fund's top sector allocation weightings include consumer discretionary at 23.5%, utilities at 21.9%, and materials at 10.6%. Electric power transmission giant Transmissora Alianca de Energia Eletrica S.A. (TAEE11.SA) takes the top stock allocation at 5.17%. The ETF's 0.59% spread and average daily trading volume of about 23,000 shares make using limit orders worthwhile to minimize slippage. BRF charges an annual management fee of 0.60% and has a YTD return of 17.28% as of Oct. 23, 2019.

BRF shares have moved steadily higher throughout 2019, although two deep retracements to the 200-day simple moving average (SMA) stand out on the fund's chart. Also, the 50-day SMA sits positioned above the 200-day to confirm the uptrend. Price started its current move higher from the symmetrical triangle's lower trendline last week and broke out above the pattern's top trendline in Tuesday's session. Implement an exit strategy by placing a stop underneath the 50-day SMA and booking profits near major resistance at $25.50.

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