A sunny start to the year for Brazilian equity ETFs

Mar 5th, 2018 | By | Category: Equities

So far this year, ETFs tracking Brazilian equity indices have reflected the country’s sunny summer weather. 

A sunny start to the year

A sunny start to the year for Brazilian equity ETFs.

The Ibovespa, an index representing around 60 highly traded stocks listed on the Bolsa de Valores do Estado de São Paulo (São Paulo stock exchange) and the underlying reference for the Lyxor Brazil (Ibovespa) UCITS ETF (RIOU LN), is up some 10% year-to-date on the back of an improving economic background.

Recent data shows the country has achieved its strongest rate of employment growth for almost seven years while there has been a simultaneous, robust and accelerated rise in manufacturing production.

A bright outlook for the biggest economy in Latin America

Commenting on the Brazilian Manufacturing PMI survey data released Thursday, Tim Moore, associate director at IHS Markit, a financial data vendor and index provider, said: “Brazilian manufacturers enjoyed a positive month in February, with new business growth picking up speed after the setback seen at the beginning of this year.”

“The latest PMI reading was one of the strongest recorded over the past five years, and the clear upturn in staff recruitment provides an indication that the manufacturing rebound has become more deep-rooted.”

He went on, “Manufacturing employment growth was the fastest since early 2011, which contrasted with the weakness seen for much of last year. The turnaround in staffing numbers suggests that firms are becoming confident enough to seek a longer-term boost to their production schedules. Stronger demand also meant that manufacturers have become less cautious in their inventory strategies, as highlighted by stocks of inputs falling at the slowest rate for three years.”

This positive start has been supported by the unanimous upholding of former President Luiz Inácio Lula da Silva’s corruption conviction. Lula would be banned from October’s Presidential race by an unfavorable ruling, but he could still appeal the decision. The Ibovespa rallied nearly 3% on the news, hitting an all-time high above 82,000 points while Brazil’s currency, the real, rose close to a three-year high.

The country’s economy grew in every quarter of 2017 and GDP increased 0.1% over the fourth quarter, or 2.1% versus the same period in 2016.

Good news for ETF investors

This positive performance has played out well for ETFs with exposure to Brazil; there are five Brazilian ETFs in the top 10 Europe-listed equity ETFs in terms of YTD performance.

The Amundi ETF MSCI Brazil UCITS ETF (BRZ LN) has returned 12.29% YTD. The fund tracks the MSCI Brazil Index which replicates the performance of Brazilian large- and mid-cap companies. It has 53 holdings and a 37.5% exposure to financials and 14.4% to materials. Top holdings include Itau Unibanco (12.2%), Vale (9.7%) and Banco Bradesco (9.1%). The ETF is the cheapest Brazilian equity ETF listed in Europe with a total expense ratio (TER) of 0.55%. Its underlying currency is the US dollar. Its assets under management is $24 million.

There are three other funds listed in Europe tracking the same index. The largest is the iShares MSCI Brazil UCITS ETF (IBZL LN) with AUM of $470m. This fund comes in slightly more expensive with a total expense ratio of 0.65%.

The other ETFs to track the MSCI Brazil Index are the db x-trackers MSCI Brazil Index UCITS ETF (XMBR LN) and the HSBC MSCI Brazil UCITS ETF (HMBR LN).

Interestingly, only the Lyxor Brazil (Ibovespa) UCITS ETF has seen material inflows over the past couple of months, pulling in circa £24m in January and February.

Perhaps the 41.4% plunge in the MSCI Brazil Index in 2015 is still on investors’ minds.

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