Brazil ETF's Rise Stokes Volume Spike In Leveraged Counterpart

The once downtrodden iShares MSCI Brazil Capped ETF EWZ is up a staggering 27 percent over the past month as commodities prices have rebounded and an expanding corruption probe in Latin America's largest economy threatens to ensnare current President Dilma Rousseff and her predecessor, Luiz Inacio Lula da Silva.

EWZ's rally into a new bull market has been a boon for its leveraged counterpart, the Direxion Daily Brazil Bull 3x Shares BRZU. Even with a modest by its standards loss of 2.6 percent Monday, BRZU is up more than 89 percent over the past month. On a month-to-date basis, BRZU is up nearly 77 percent, a performance exceeded by just one other Direxion leveraged bullish ETF.

All that for an ETF that late last month Direxion said will be reverse split on a 1-for-4 basis on March 24.

There is no denying that the recent moves by EWZ and BRZU are impressive and data indicate investors are renewing their enthusiasm for EWZ, the largest Brazil ETF. Year-to-date, the ETF has added $15 million in new assets, but since the start of March, that number is closer to $96 million.

An issue for EWZ has been is weakness in Brazilian bank stocks, which is particularly problematic when considering the sector's issues against the backdrop of some of the developing world's highest interest rates. EWZ's financial services weight is about 33 percent, or more than 1,200 basis points larger than the ETF's second-largest sector allocation, consumer staples.

And, somewhat interestingly, EWZ closed lower Monday despite the best single-day rally for iron prices. The ETF is home to shares of Vale SA VALE, the world's largest iron ore producer.

Higher interest rates and inflation coupled with rising unemployment are factors pressuring the credit quality of Brazilian banks at a time when the country's state-controlled oil and iron ore producers are under significant duress.

While Brazilian stocks are not out of the woods, they are in better condition today than they were a few months and that has been all the impetus traders have needed to lavish some attention on BRZU. For the five days ended March 7, BRZU's volume was nearly 99 percent above the 20-day trailing average, a percentage exceeded by just one other Direxion ETF, according to issuer data. Of course, this enthusiasm does not come free of volatility. Only one of Direxion's leveraged bullish ETFs has deviated more wildly from its underlying index over the past month than has BRZU.