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Brazil Growth Outlook Worsens: ETFs in Focus

Brazil’s Finance Minister Henrique Meirelles expects a lower economic growth rate for 2017. He expects the GDP to grow 2% year over year in the fourth quarter compared with the earlier estimate of 2.7%. Therefore, the full year average is expected to be slightly less than 2%.


Meirelles stated that the lowered outlook is because of the recent political crisis that inundated Brazil. President Michel Temer was accused of accepting bribes from meat-packing company JBS. Earlier this week, corruption charges were brought against him by the prosecutor general of the country (read: Should You Buy Brazil ETFs After Brutal Sell-Off?).


Adding to the agony, lower tax revenues also led to lower growth forecast. However, Meirelles noted that there are still chances of raising taxes in the country to increase government revenue (read: Brazil ETFs Fall as President Temer Faces Corruption Charges).


Consumer prices in Brazil rose 3.6% year over year in May 2017 compared with a 4.08% in the previous month. Moreover, the central bank cut its key benchmark rate for the sixth straight time in May. It was reduced by 100 basis points to 10.25%.


Let us discuss some ETFs focusing on providing exposure to Brazilian equities (see all Latin America Equity ETFs here).


iShares MSCI Brazil Capped ETF EWZ


This fund is the most popular ETF providing exposure to Brazilian equities. It focuses on the most liquid companies in the large-cap segment.


It has AUM of $5.44 billion and charges a fee of 63 basis points a year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 36.07%, 15.97% and 11.86% allocation, respectively (as of June 27, 2017). The top three holdings are Itau Unibanco Holding Pref SA, Ambev SA and Banco Bradesco Pref SA with 11.66%, 8.49% and 8.20% allocation, respectively (as of June 27, 2017). The fund has returned 2.69% year to date and 14.88% in the last one year (as of June 28, 2017).


First Trust Brazil AlphaDEX Fund FBZ


This ETF offers a chance to gain exposure to Brazilian equities but is relatively expensive.


It has AUM of $24.29 million and charges a fee of 80 basis points a year. Materials, Financials and Utilities are the top three sectors of this fund with 23.53%, 22.87% and 22.51% allocation, respectively (as of June 27, 2017). The top three holdings for the fund are Vale SA, Itausa-Investimentos and Fibria Celulose S.A. with 3.68%, 3.47% and 3.43% allocation, respectively (as of June 27, 2017). The fund has returned 0.37% year to date and 7.1% in the last one year (as of June 28, 2017).


Let us now compare the performance of this fund to a broader Latin American ETF, ILF.


iShares Latin America 40 ETF ILF


This fund focuses on providing exposure to Latin American equities. It tracks the S&P Latin America 40 Index.


It has AUM of $920.13 million and charges a fee of 49 basis points a year. From a geographical perspective, the fund has top exposures to Brazil, Mexico and Chile, with 54.5%, 28.09% and 10.72% allocation, respectively (as of June 27, 2017). From a sector look, Financials, Consumer Staples and Materials are the top three allocations of the fund, with 34.66%, 16.74% and 16% exposure, respectively (as of June 27, 2017). Itau Unibanco Holding ADR, Banco Bradesco ADR Reptg Pref SA and Ambev ADR SA are the top three holdings of the fund, with 8.79%, 6.33% and 6.02% exposure, respectively (as of June 27, 2017). The fund has returned 9.64% year to date and 15.02% in the last one year (as of June 28, 2017).


Below is a chart, comparing the year-to-date performance of the three funds.


 
Source: Yahoo Finance


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ISHARS-BRAZIL (EWZ): ETF Research Reports
 
FT-BRAZIL AD (FBZ): ETF Research Reports
 
ISHARS-LATIN 40 (ILF): ETF Research Reports
 
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