Brazil ETFs Trade at Trendline Support

Low interest rates and economic reform support further gains

Brazil's Bovespa index returned 32% in 2019, making it the best performing stock market gauge in the Americas last year. Furthermore, analysts expect Brazilian stocks to add to their impressive rally in 2020, underpinned by record-low interest rates and market-friendly economic reform designed to encourage investment.

"We continue to see room for the Brazilian market to re-rate on lower cost of equity (supported by reform momentum, low interest rates, and fresh flows from international and domestic investors)," Itau BBA strategist Pablo Ordonez wrote in a report cited by Bloomberg.

U.S.-based traders and investors can gain cost-effective access to Brazilian stocks through the three exchange-traded funds (ETFs) discussed below. Let's review the metrics of each fund and explore several trading opportunities.

iShares MSCI Brazil Capped ETF (EWZ)

Formed in 2000, the iShares MSCI Brazil Capped ETF (EWZ) aims to provide similar returns to the MSCI Brazil 25/50 Index. To achieve its objective, the fund invests its enormous $10.21 billion asset base in stocks and American depository receipts (ADRs) that make up the underlying index. Financials command the top sector allocation, with a weighting of 35.77%, making the ETF particularly sensitive to the performance of Brazil's leading banks. A middle-of-the-road 0.59% management fee facilitates longer holding periods, while tight spreads and ample liquidity keep trading costs in check for short-term strategies. EWZ issues a 2.75% dividend yield and has fallen 9.40% year to date as of Feb. 12, 2020.

EWZ shares have tracked lower since the start of the year but rallied sharply yesterday from a nine-month uptrend line and the 200-day simple moving average (SMA). Furthermore, Tuesday's price bar completed a bullish abandoned baby candlestick pattern that typically signals an upside reversal – especially when it forms near key support. In terms of trade management, traders could place a stop-loss order underneath this month's low $42.69 and think about booking profits near the 52-week high at $48.48.

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

Direxion Daily MSCI Brazil Bull 3X Shares (BRZU)

With assets under management (AUM) of $311.17 million, the Direxion Daily MSCI Brazil Bull 3X Shares (BRZU) has an objective to deliver a return that corresponds to three times the daily performance of the MSCI Brazil 25/50 Index – the same benchmark used by EWZ. The added leverage makes the ETF a suitable instrument for traders who want an aggressive short-term bullish bet on large-cap Brazilian stocks such as mining giant Vale S.A. (VALE) and banking bellwether Itau Unibanco Holding S.A. (ITUB). Daily turnover of 1.6 million shares, coupled with tight spreads, helps minimize slippage. As of Feb. 12, 2020, BRZU is trading nearly 30% lower on the year and yields 1.24%.

Although the ETF recently dipped below the 200-day SMA, buyers returned yesterday, pushing price off trendline support at $28. Traders who expect the rebound to continue should look for a move back to around $40, where the fund may encounter resistance from the prominent July and January swing highs. Consider cutting losses if the price fails to hold above the Feb. 10 low at $27.50.

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

VanEck Vectors Brazil Small-Cap ETF (BRF)

The VanEck Vectors Brazil Small-Cap ETF (BRF) seeks to track the performance of the MVIS Brazil Small-Cap Index – a market cap-weighted composition of smaller Brazilian companies. The 11-year-old fund tilts toward financials and utilities, allocating 22.25% and 21.14% of its portfolio to these respective sectors. An average 0.53% spread and moderate daily share volume make the fund suited to strategies that can capture larger moves to offset slightly higher trading costs. BRF controls net assets of $90.45 million, charges a 0.60% annual management fee, and has slipped 8.68% on the year as of Feb. 12, 2020. Over the past 12 months, the ETF has returned nearly 15%.

A wave of profit-taking in recent weeks has seen BRF shares give back about 50% of their healthy December gain. The pullback provides swing traders with a high-probability entry point at the $25 level, where price finds support from the top trendline of a broad ascending triangle. Those who buy the fund should bank profits on a test of crucial overhead resistance at $28. Limit downside risk with a stop positioned beneath this month's low at $25.05.

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