Brazilian equities have had a rough 2015 so far. We can gauge this by looking at the iShares MSCI Brazil Capped ETF (EWZ), which has returned -32.5% until August 24, 2015. The ETF, which comprises 68 holdings, is benchmarked to the MSCI Brazil 25/50 Index. This index comprises stocks of large-cap and mid-cap Brazilian companies.
Another Brazil ETF that has similar characteristics, except that it is currency hedged, is the Deutsche X-Trackers MSCI Brazil Hedged Equity ETF (DBBR). It has posted YTD (year-to-date) returns of -17.2% until August 24, better than EWZ, as it was helped by the currency hedge. Let’s see what has contributed to these negative returns.
EWZ and DBBR have similar portfolio compositions. The graph above shows the average sectoral exposure of EWZ in YTD 2015. Financials form the biggest portion of the Brazil ETF portfolios. Financials and consumer staples form over half of the total portfolio of these Brazil ETFs.
None of the sectors comprising this ETF positively contributed to total returns. The healthcare sector was the least negative contributor to total returns at -0.43%. Although total returns of the sector stand at -46.0% YTD, their small exposure at 0.84% of the total portfolio helped limit further losses. The information technology sector was second to healthcare among the least negative contributors to total returns with returns of -0.84%.
Financials were the biggest negative contributors to returns, at -11.27%. Preferential stocks of Banco Bradesco S.A. (BBD) and Itaú Unibanco Holding S.A. (ITUB) were the biggest underperformers in EWZ.
Although materials shares comprised only 10.9% of the total assets in YTD 2015, their contribution to total return was the second worst to financials at -4.33%. Preferential and common stocks of Vale S.A. (VALE) pushed the contribution of this sector into negative territory. Petrobras (PBR), Telefônica Brasil S.A. (VIV), and Embraer SA (ERJ) were also among big negative contributors to the total returns.
As all sectors saw negative returns in general, and financials and materials fell in particular, they led to a steep fall in Brazil ETFs in YTD 2015.
From Brazil, let’s move on to Russia in the next article.