Investor FX: Brazil ETFs Hurt By Weak Real

April 24, 2012

A weakening Brazilian real is killing returns for U.S.-based investors in funds like EWZ.

U.S. investors in Brazil have been plagued by the depreciation of the real over the past year, and last week was no exception as Brazil’s central bank again slashed its benchmark borrowing rate.

In the past year, U.S. investors in Brazil have seen returns of -17.62 percent, while local investors have suffered losses of just 1.27 percent, as shown in this week’s IndexUniverse Currency Impact Report. Last week alone, U.S. investors in Brazil lost 1.14 percent, while locals saw gains of 1.10 percent.

Isolating the currency variable, the real has depreciated by 15.29 percent against the dollar over the past year, diminishing any positive gains that have resulted from pure equities exposure, such as the iShares MSCI Brazil Index Fund (NYSEArca: EWZ).

The table below illustrates the real’s impact.

MSCI Country
1 Week 3 Months 12 Months
USD Local FX
USD Local FX
USD Local FX
Brazil BRL -1.14% 1.10% -2.24% -3.97% 2.28% -6.25% -17.62% -1.27% -16.35%
Chile CLP 1.29% 1.45% -0.17% 8.16% 6.90% 1.25% -6.42% -3.22% -3.20%
Colombia COP 1.54% 1.16% 0.38% 15.33% 11.61% 3.72% 13.39% 12.30% 1.09%
Peru PEN 0.72% 0.68% 0.04% 8.98% 8.78% 0.20% 14.86% 14.45% 0.41%
Mexico MXN 2.67% 2.39% 0.28% 6.54% 5.65% 0.90% -2.91% 9.54% -12.46%

U.S. investors in EWZ and in the First Trust Brazil AlphaDex ETF (NYSEArca: FBZ) have lost 16.69 percent and 12.08 percent over the past year, respectively.

Meanwhile, investors who hedged out the currency exposure by owning ETFs such as the db-X MSCI Brazil Currency-Hedged Equity Fund (NYSEArca: DBBR) returned -11.92 percent.

The real’s depreciation should serve as a huge cause for concern among those still invested in one of the more prominent members of the so-called BRIC countries—Brazil, Russia, India and China.

Earlier this week, the Financial Times argued that Brazil has won the “currency war.” The Brazilian central bank, in an effort to end a lasting rally in the real, has lowered its benchmark interest rate over the past 15 months by 350 basis points, bringing the rate to 9 percent as of the latest cut last week.

To make matters even worse for U.S. investors, there’s speculation that Brazilian authorities may change the rules governing savings accounts. If successful, the law would require minimum returns on savings accounts.

As a result, local investors would likely move from government bonds into the more favorable savings accounts—further forcing the real to depreciate as investors sell their bonds for cash.

U.S. investors in Brazil-focused ETFs would do well to mind their portfolios in the meantime, as the real may pose a further threat to returns.

In other news, the euro gained against the dollar last week, enhancing the returns for U.S. investors who own ETFs like the iShares S&P Europe 350 Index Fund (NYSEArca: IEV) and even the iShares MSCI Switzerland Index Fund (NYSEArca: EWL).

The Swiss central bank recently appointed Thomas Jordan as head of the bank. Jordan has affirmed that he fully backs maintaining the pegged exchanged rate for the euro against the franc.

For more data, see the IndexUniverse Currency Impact Report.


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