The Brazil ETF, a Risk Worth Taking? (EWZ) 1.2

Over the last 18 years, the iShares MSCI Brazil ETF (EWZ) and an S&P 500 index fund have both compounded at a rate of 6%. But, EWZ has experienced 2 ½ times more volatility during that time. So, why bother investing outside of the United States or a basic S&P 500 fund? I believe the best reason is correlation. The EWZ ETF has a relatively low correlation coefficient of 0.64. This correlation to U.S. Markets is very useful in building a worldwide equity portfolio that consistently has some components going up while others are going down. This volatility is also a gift to those who are willing to wait for deep downturns to buy shares. In the case of the Brazil ETF, that volatility will arise just about every election cycle.

The chart below makes EWZ look very risky, and it is. In fact, the standard deviation of EWZ is 35%, while it is only 14% in an S&P 500 index fund. Bottom line, if you don’t like volatility in your portfolio, a single country ETF, like EWZ, probably isn’t for you. On the other hand, investors who understand the benefits of volatility and arbitrage will typically see opportunity when observing a chart like this.

EWZ vs S&P 500 index fund: August 2000 – September 2018

Source: https://www.portfoliovisualizer.com/

As with all large economy countries, recessions come and go. The Brazil economy is huge. In fact, it is currently the 8th largest economy in the world. Brazil is still in recovery mode from its’ last recession and is currently in middle of dramatic election process. Many pin their hopes of the EWZ ETF increasing in value based on the results of this election. Contrarily, I am utilizing history as the basis of my investment in Brazilian companies. Here’s another chart of the EWZ ETF with more up-to-date information.

EWZ vs SPY: July 14, 2000 – October 21, 2018

Source: https://www.koyfin.com/home

An easier route to access Brazil equities, and potentially safer, is to own an emerging markets fund such as the iShares MSCI Emerging Markets ETF (EEM). Personally, I own the WisdomTree Emerging Markets High Dividend Fund (DEM). But, these funds pale in comparison to single country ETFs in volatility. This volatility can be a gift to patient investors. In the following chart, you’ll see that the volatility and U.S. Market correlation of EWZ dwarfs that of EEM.

EWZ vs EEM vs S&P 500 index fund: May 2003 – September 2018

Source: https://www.portfoliovisualizer.com/

Here’s another chart with the same funds with the most current data.

EWZ vs EEM vs SPY: April 11, 2003 – October 21, 2018

Source: https://www.koyfin.com/home

Here are the objectives of EWZ according to the iShares website: The iShares MSCI Brazil ETF seeks to track the investment results of an index composed of Brazilian equities. Exposure to large and mid-sized companies in Brazil. Targeted access to the Brazilian stock market. Use to express a single country view.

Here are the most recent statistics for this fund:

  • Expense ratio: 0.60%
  • Distribution yield: 3.58%
  • Net assets: $6.6B
  • Benchmark: MSCI Brazil 25/50 Index
  • Average daily volume: 40M shares/day
  • Number of holdings: 54
  • P/E ratio: 16.39
  • P/B ratio: 1.88

EWZ Top 10 Holdings

For investors looking for an emerging market fund with good risk/reward potential, I believe EWZ will meet the needs. For investors wanting low volatility or “safety”, I suggest they look elsewhere. Brazil is a huge economy and has a huge population base that wants what most peoples want, a better life, jobs, and economic security. I hope and believe they will achieve these desires. To what degree, I do not know, but it is my opinion that the potential rewards of owning Brazilian equities outweighs the potential risks.

Thank you for taking time to read this article. If you found it useful, please share it with a friend.

Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator

Disclosure: We own shares of EZM and we intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.

Previous Deep Value ETF Accumulator article on the EWZ ETF: MAY 19, 2017 Is the Brazil ETF Worth the Risk? EWZ $EWZ