Brazil’s benchmark stock market proxy, the Bovespa Index (^BVSP), has registered a similar year-to-date (YTD) return to the S&P 500 Index – 19.94% vs. 18.86%. The Bovespa has turned in this solid performance despite Brazil’s economic growth shrinking in the first quarter of 2019 and economists expecting it to contract again in the second quarter to record a technical recession – defined by two consecutive quarters of negative gross domestic product (GDP) growth.
Investors have looked beyond the near-term horizon and focused their attention on a groundbreaking broad pension reform bill that aims to overhaul the nation’s generous but stifling pension system. A special committee approved the proposed legislation in the lower House of Deputies on July 4, and it now advances for lower house plenary voting. If successful there, the bill moves to Brazil’s Senate for final acceptance.
Economy Minister Paulo Guedes has estimated that the plan to overhaul the nation’s social security system could save as much as 3 trillion reais ($790 billion) over 20 years, per Reuters. Furthermore, the prospect of lower interest rates has also supported Brazilian stocks. Economists expect the country’s central bank to slash the official lending rate from an already record low 6.5% to 5.75% by year end.
Traders can gain access to the Brazilian economy using these three exchange-traded funds (ETFs). Let’s take a closer look at each particular fund and run through several trading plays using technical analysis in the lead-up to the reform bill’s expected approval.
iShares MSCI Brazil Capped ETF (EWZ)
Launched back in 2000, the iShares MSCI Brazil Capped ETF (EWZ) seeks to provide investment results that correspond to the MSCI Brazil 25/50 Index – a benchmark comprising Brazilian equities across all market cap sizes. The enormous $8.79 billion fund tilts toward financials, with nearly 40% of its assets allocated to the sector. It also offers ample exposure to the basic materials, energy, and consumer discretionary sectors, with respective weightings of 13.99%, 13.44%, and 12.53%. The ETF minimizes trading costs with its narrow 0.02% average spread and dollar volume liquidity of $1.08 billion. Its 0.59% management fee sits about double the category average but shouldn’t severely affect short holding periods. EWZ has gained 19.94% YTD – returning 10.24% in the past month alone, as of July 10, 2019.
The EWZ share price broke above its late-January high on July 5 and has continued trending upward since. Those wanting to enter the ETF can either buy the current breakout or wait for a retracement to the $45 level that now acts as a crucial support zone. Consider using a fast-period simple moving average (SMA), such as the 10-day, as a trailing stop to let profits run. Set an initial stop-loss order beneath this month’s low at $43.13 to protect trading capital.
iShares MSCI Brazil Small-Cap ETF (EWZS)
With assets under management (AUM) of $88.16 million, the iShares MSCI Brazil Small-Cap ETF (EWZS) aims to track the performance of the MSCI Brazil Small Cap Index. As its name suggests, the fund provides traders with access to Brazilian small-cap stocks. The utilities sector commands the top asset allocation at 21.47%, followed by financials at 19.75% and consumer discretionary at 17.72%. Key holdings in the ETF’s portfolio include airline stock Azul S.A. (AZUL), education company Estácio Participações S.A. (ECPCY), and consulting software maker TOTVS S.A. (TOTS3.SA). Those who trade the ETF should use limit orders to combat its 0.39% average spread. As of July 10, 2019, EWZS charges a 0.59% management fee, offers an attractive 3.52% dividend yield, and has returned nearly 13% over the past month.
EWZS shares broke out above a pennant pattern after the reform bill successfully passed Brazil’s lower House of Deputies last week. The bulls have kept the upward momentum intact, with the fund reaching a new 52-week high each day since that progress was made. A relative strength index (RSI) reading in deep overbought territory increases the probability of some consolidation before the ETF tests higher prices. Therefore, traders should consider entering on a pullback to pennant’s top trendline at around $17. Think about banking profits on a move up the fund’s all-time high at $24.24. Exit losing trades if price reverses below the pennant’s lower trendline.
First Trust Brazil AlphaDEX Fund (FBZ)
The First Trust Brazil AlphaDEX Fund (FBZ), created in 2011, attempts to provide similar returns to the NASDAQ AlphaDEX Brazil Index. FBZ uses a proprietary methodology to invest in Brazilian stocks best positioned to outperform the market. Like EWZS, the ETF top weights the utilities sector, with its exposure sitting at roughly 20%. Other sizeable sector weightings include consumer discretionary at 18.09% and financials at 15.44%. The fund’s assets of more than $135 million have an even spread across a portfolio of 51 holdings, with no single allocation carrying more than a 6% weighting. Liquidity can be sporadic at times, with about 13,000 shares changing hands per day. FBZ has an expense ratio of 0.80% and is up 10.75% over the past month as of July 10, 2019. Investors also receive a 3.28% dividend yield.
As to be expected, the FBZ chart looks very similar to that of the first two Brazilian funds discussed. The price hasn’t looked back since its mid-May retracement to the 200-day SMA, setting a new 52-week high at $16.85 in Tuesday’s trading session. Those who expect the fund to move higher should seek an entry price at the $15.75 level, where a horizontal line connecting several swing highs provides critical support. Traders may decide to trail a stop under the previous day’s low as an exit strategy.