MSCI Brazil Index Fund
Carnivals, beaches, samba, football… These may be the first things that come to mind about Brazil, the largest economy of South America. With a Gross Domestic Product (GDP) of $1.87 trillion and an impressive growth rate, Brazil is ranked as the 9th largest economy in the world.
Despite the rankings, Brazil is considered as an emerging market and not a fully developed economy. The GDP per capita for over 200 million Brazilians is approximately $9,000, and the country has the 2nd highest income gap among the developing economies, after South Africa, which breeds the infamous crime rate of Brazil.
Still, Brazil is one of the most prominent emerging markets along with Russia, India, China, and South Africa. Together they are known as the BRICS – the leading emerging markets which are watched closely by analysts and attract investors who seek to gain an edge over untapped investment opportunities.
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What is MSCI Brazil Index?
MSCI Brazil Index (NYSEARCA: EWZ) is a stock market index which monitors 55 large-cap and mid-cap stocks in the BOVESPA Stock Exchange in Sao Paulo and accounts for 85% of the total market value of all Brazilian stocks. It is traded as an exchange-traded fund (ETF) in the NYSE Arca under the ticker EWZ.
MSCI Brazil Index was created on July 10, 2000, by Morgan Stanley Capital International (MSCI) to assess the performance of the stock market performance of Brazil as an emerging market. At the beginning of 2001, BlackRock investment corporation added the index to its selection of iShares ETF instruments and launched iShares MSCI Brazil ETF (EWZ).
In 2012, the MSCI Brazil Index was updated to cap the weight of a single stock to 25% and to limit the total weighting of the stocks with over 5% weight to a 50% maximum. Thus, the MSCI Brazil 25/50 Index was formed and became the new benchmark for the EWZ ETF, naming it iShares MSCI Brazil Capped ETF.
Market History of MSCI Brazil Index
iShares MSCI Brazil ETF started trading at $16.88 per ETF share. Brazil was one of the fastest growing economies between 2000 and 2008, which helped EWZ to rise consistently until it reached its all-time high at $102.21 just before the 2008 Financial Crisis. The global recession hit the index along with the rest of the market, and the ETF price dropped to $35 area.
EWZ managed to recover in the next two years and settle in the $60-$80 range. However, the Brazilian economy fell into recession in 2011 which led to extreme inflation in 2015, causing EWZ to dip to $20.
In 2016, inflation was taken under control, and the ETF climbed back and stabilised between $30 and $50. However, at the end of 2019, the Coronavirus crisis pushed iShares MSCI Brazil ETF right back into the pit it had just climbed out of.
MSCI Brazil Index Composition
With more than $12 billion asset portfolio, EWZ is the largest single-country ETF and the third largest emerging markets ETF. It lists 55 of the large-cap and mid-cap companies in the Brazil stock market and represents 12 sectors.
MSCI Brazil Index is a free-floating market capitalisation weighted index. The weightings of the EWZ stocks are based on the percentage of publicly traded shares.
According to the 2012 update, the maximum weight of a single stock can be 25%, and the total weighting of the stocks with over 5% weight can’t exceed 50% of the portfolio.
The EWZ commission of MSCI meets on a quarterly basis to revise the performances of the index and its constituents in the previous quarter.
Index rebalancing occurs in the 2nd and 4th quarter meetings (1st and 3rd quarters are evaluated respectively); underperforming stocks are replaced with next eligible companies, and weightings are updated to reflect the changes in market capitalisations.
Sectors in the MSCI Brazil Index
| Sector | Index Weight |
| Financials | 29.73% |
| Materials | 14.82% |
| Consumer Staples | 12.12% |
| Energy | 11.70% |
| Consumer Discretionary | 9.71% |
| Industrials | 7.93% |
| Utilities | 5.67% |
| Health Care | 2.74% |
| Communication | 2.66% |
| Real Estate | 1.29% |
| Cash and/or Derivatives | 1.18% |
| Information Technology | 0.45% |
Top 10 Companies in the MSCI Brazil Index
| Company | Sector | Index Weight |
| Vale | Materials | 10.00% |
| Itau Unibanco | Financials | 7.83% |
| Banco Bradesco | Financials | 5.96% |
| Petroleo Brasileiro | Energy | 5.23% |
| B3 Brasil Bolsa Balcao | Financials | 5.19% |
| Petrobras | Energy | 4.69% |
| Ambev | Consumer Staples | 3.56% |
| Magazine Luiza | Consumer Discretionary | 2.89% |
| WEG | Industrials | 2.69% |
| Itausa | Financials | 2.58% |
How to Trade iShares MSCI Brazil Index ETF?
The composition of the iShares MSCI Brazil Index ETF is skewed towards Finance and Energy. These sectors fuel the activity in other major industries like Service, Materials, Agriculture and Tourism. Thus, the EWZ ETF is considered as one of the leading indicators of the future performance of the broader Brazilian economy.
The weight-capped composition of EWZ diminishes the impact of the volatility in individual stocks and mitigates any biases in the price fluctuations. However, the top four industries have over 65% weight in the index value, which elevates the ETF’s risk exposure to the market events specifically related to these.
iShares MSCI Brazil ETF Trading Information
- Benchmark Index: MSCI Brazil 25/50 Index
- Exchange: NYSE Arca
- Ticker: EWZ
- Trading Hours: Monday to Friday, 13:30 – 19:59 (GMT).
- MT4 & MT5 Symbol: #EWZ
- Valuation: S. Dollars ($)
- Leverage: Up to
- Trade Size: 10 shares
- Spread: 13%
- Increment: 0.1
Fundamental Analysis of MSCI Brazil Index ETF
As a country-specific ETF, iShares MSCI Brazil is mainly affected by the factors which can influence the local economy and business environment. Fundamental factors affect the market sentiment towards the future performance of the Brazilian economy, which is the main determinant of the investors’ decisions to buy or sell the stocks in the EWZ ETF.
Fundamental analysis of EWZ considers the national socio-political and macroeconomic factors like elections and economic policies; the global and local market events which can impact the business activity of the component sectors; and the company-specific developments which directly influence the price of the respective stock.
Country-wide fundamental factors
Brazilian Politics
The political scene in Brazil has witnessed several controversies including the imprisonment of two former presidents due to corruption. The current president, Bolsonaro, was also elected amid controversies, though the market sentiment had improved upon his statements which promised support for a free market and fewer regulations. The rocky socio-political environment of the country contributes to the general risk level of Brazilian assets. Any signs of political instability repel the investors of the EWZ stocks and create a considerable level of volatility.
The Central Bank of Brazil
After the inflation was harnessed in 2016, the Central Bank of Brazil adopted an expansionary monetary policy and gradually cut the interest rates from 14.25% to 4.50% at the end of 2019. Since extreme economic conditions were present, efforts to stimulate the economy paid out and increased the general demand, which added value both to the Brazilian Real (BRL) and to the Brazilian stock market.
International Trade
As the largest economy in South America, Brazil has strong trading partnerships with China, the U.S, and the E.U. Its balance of trade recorded a $46.67 billion trade surplus in 2019, though it has been on a downtrend since 2016.
The country’s import and export are mainly comprised of Services, Mining, Agriculture, and Industrial Manufacturing sectors. The Services industry is notably important as it represents a hefty 71% of the national GDP and includes Tourism and Finance sectors.
Sector-wide fundamental factors
Demand and Supply
The business demand for EWZ big wigs is mostly generated from international trade. Energy and Finance sectors basically serve as a fuel, both literally and financially, for the expansion of agricultural and industrial production, tourism and hospitality, and investments in retail subsectors. Thus, any signs of growth in these industries, such as manufacturing reports, can translate into a potential rise in the demand for EWZ companies.
Global Markets
Materials (mining, chemicals, and forestry) and Energy sectors represent approximately 25% of the EWZ ETF and are heavily influenced by the global commodities market.
Brazil has rich non-precious metal resources like aluminium and iron, which are important raw materials for consumer electronics, aviation, and construction industries. Enhanced global activity in these industries can drive Materials stocks and EWZ higher.
Furthermore, Materials is a large oil-consuming sector as manufacturing requires a lot of energy. When the demand for Materials increase, its demand for Energy products increase as well and collectively add value to 25% of the EWZ. The energy sector is mainly driven by Crude Oil prices, which can be affected by its supply and demand as well as OPEC decisions.
Taxes and Regulations
Brazil inhabits an important section of Amazon rainforests. Although the political climate encourages a free market, environmental concerns often lead to the implementation of new regulations which hinder the production capacity in the Materials and Energy sectors.
Furthermore, the Financials industry, which is the largest EWZ sector with almost 30% weight, is heavily regulated by the central bank. Monetary policy decisions on interest rates, asset purchases and reserve requirements directly influence the availability and costs of financial products, which affect the market demand and the business performance of banks and financial institutions.
Moreover, consumer-oriented sectors have over 20% weight on the EWZ index; when taxes increase, the purchasing power of consumers is reduced. As a result, consumer spending drops and reduces the revenue of the companies in the consumer-oriented sectors, reducing their stock prices.
Company-specific fundamental factors
iShares MSCI Brazil ETF is comprised of 55 companies from 12 industries. The weighting cap of the index limits the direct effect of individual stocks on the EWZ price; however, high-weighted sectors and firms are still considerably influential.
Earnings Reports released by the companies show the revenue, profit, and earnings per share (EPS) of the company in the focused quarter. If a top-ranked company’s performance is better than the previous quarter or the same quarter of the previous year, the investors can perceive a potential expansion and buy its stocks, which would raise the EWZ price. However, in the opposite scenario, the market sentiment towards the company would sour and consider the volatile political climate of Brazil, which would lead to rapid selling of the stocks and decrease in the index.
Why Trade MSCI Brazil Index ETF with AvaTrade?
Traditional EWZ trading requires a long and tedious registration to NYSE Arca and purchasing the EWZ ETF shares, which comes with the macroeconomic and socio-political risks of long-term trading of the Brazilian economy.
However, thanks to CFD trading, these are no longer relevant. Traders can continue capitalising on the short- and mid-term EWZ ETF price movements without having to purchase the physical shares with AvaTrade.
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Dance the Market Samba!
The high return & risk potential of iShares MSCI Brazil Index ETF provides traders who are interested in diversifying their portfolio by capitalising in emerging markets. Now that you learned how to dance in the Brazilian market, open an account with AvaTrade and start trading!
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