🤯 Have you seen our AI stock pickers’ 2024 results? 84.62%! Grab November’s list now.Pick Stocks with AI

Getting 'Real' About Brazil ETFs

Published 08/18/2013, 12:45 AM
Updated 05/14/2017, 06:45 AM
DBKGn
-

Among the plethora of problems plaguing Brazil ETFs this year has been the sagging real. Brazil's currency is one of the emerging world's worst performers against the U.S. dollar this year. At the end of January, $1 would have bought less than two real. Today, a greenback buys nearly 2.39 real.

Exacerbating the problem is high inflation and the ineffectiveness of interest rate increases courtesy of Brazil's central bank. Those problems trickle over to popular Brazil ETFs because these funds are not hedged, which means investors in those products are exposed to some level of currency risk.

Given the popularity of some hedged currency ETFs and the impressive returns thus far offered by the WisdomTree Japan Hedged Currency Fund (DXJ) and the db X-trackers MSCI Japan Hedged Equity Fund (DBJP), applying a similar approach to investing in other countries with volatile currencies is worth considering. At the very least in the case of Brazil, it can mean doing less bad than a unhedged strategy.

Enter the db X-trackers MSCI Brazil Hedged Equity Fund (DBBR). DBBR tracks the MSCI Brazil US Dollar Hedged Index, the currency hedged answer to the MSCI Brazil 25/50 Index, the index tracked by the popular iShares MSCI Brazil Capped ETF (EWZ).

Hedged currency ETFs do not prevent investors from being exposed to all of a country's fundamental flaws, of which there are a few in Brazil.

In fact, DBBR has larger allocations to some of the more controversial Brazilian large-cap than does EWZ. For example, DBBR allocates 13.6 percent of its weight to two Petrobras (PBR) securities and 11.6 percent of its weight to Vale (VALE), the world's largest iron ore producer, according to Deutsche Bank data.

By comparison, EWZ's weight to Petrobras is 12 percent and just over 10 percent to Vale. DBBR also has a slightly larger to bank stocks, 29.8 percent compared to 26.8 percent for EWZ. In favor of the currency hedged fund is a 23.4 percent allocation to consumer staples names, which is about 700 basis larger than EWZ offers.

DBBR also features a slight lower allocation to Brazilian utilities, which is a good thing considering that sector is seen as hampering the country's near-term dividend growth.

Importantly, the hedged currency index has been less bad than its unhedged counterpart. For the year-to-date period ending July 31, DBBR's index was down 12.5 percent compared to 19.2 percent for EWZ's index, according to issuer data provided to Benzinga.

DBBR features a gross expense ratio of 1.13 percent, but investors can defray some of that cost because the ETF can be traded commission-free on E*Trade.

BY Todd Shriber

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.