Trying To Say Something Nice About Brazil ETFs

Positive musings about the exchange traded funds tracking Brazil, Latin America's largest economy, are unlikely to appear here. Perhaps that will change in the future, but it is also highly likely that the future is measured in months or years rather than days or weeks.

This is how bad things have gotten for the likes of the iShares MSCI Brazil Capped ETF EWZ and how desperate investors have become when it comes to searching for any tiny bit of good news pertaining to Brazil's imperiled economy and equity markets: On Tuesday, Moody's Investor's Service downgraded Brazil's sovereign credit rating to Baa3, the ratings agency's lowest investment.

Alas, this is supposed to be interpreted as good news because Moody's did not assign a negative outlook to Brazilian debt, which diminishes the chances of the ratings agency imminently assigning Brazil a junk rating. Some outlets even portrayed the stable outlook from Moody's as a “silver lining.”

Markets Selling Off

As far as the Brazil ETFs trading in the United States are concerned, markets are telling a different story. Four of the ETFs that have hit 52-week lows to this point in Wednesday's session are Brazil funds and that number does not include scores of diversified emerging markets ETFs also hitting new lows that are heavily allocated to Brazilian stocks.

EWZ resides near 10-year lows while the Market Vectors Brazil Small-Cap ETF BRF and the Direxion Daily Brazil Bull 3x Shares BRZU earlier hit all-time lows. While it may be nice that Moody's did not slap a negative outlook on Brazilian bonds, it is also clear investors are acknowledging risks with Brazilian debt and equities.

Related Link: There Might Be Some Good News For MLP ETFs

Sure, only one emerging markets bond ETF has hit a 52-week low on Wednesday, but that fund has a 9.4 percent weight to real-denominated debt, making Brazil the ETF's fourth-largest country weight. 

It cannot be overlooked that Moody's is just one ratings agency. In July, “S&P affirmed Brazil’s credit rating at BBB-minus, the lowest possible investment grade rating, and could downgrade the nation over the next 12 to 18 months,” according to EmergingEquity.org. “S&P said it believes that there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”

Assuming the best case scenario, that being Brazil holding on to its investment-grade status, there is still the matter of the country's interest rate policy. Home to benchmark rates of 14.25 percent, Brazil has some of the highest interest rates in the world, developed or emerging markets. The country's inflation data indicate rate cuts are a far-flung concept. Last month, Brazilian inflation checked in at almost 9.6 percent, the fifth straight month the number was above 8 percent. 

In the US, investors expect higher interest rates to help financial services stocks, but that has not been the case in Brazil. That sector is the larges weight in EWZ to the tune of almost 32 percent, but that ETF is off 26.7 percent this year. The Global X Brazil Financials ETF BRAF has tumbled 28.1 percent.