A true “Black Swan” event has hit the tape out of Brazil, involving an emerging political scandal surrounding President Michel Temer, and the benchmark ETF there EWZ (iShares MSCI Brazil) is down an astounding 15% as a result.
The fund is giving up all of its gains since last December in a matter of one session thus far today, and sessions like these put the leveraged “Brazil Bear” fund BZQ (up an eye-popping 30%+ today) firmly in focus. We also have the “Leveraged Bull” BRZU (Direxion Daily Brazil Bull 3X, Expense Ratio 0.95%) and UBR (ProShares Ultra MSCI Brazil, Expense Ratio 0.95%), which are taking big hits today, as expected.
Brazil, as we have mentioned in this piece not long ago, is the fifth largest weighting in the MSCI Emerging Markets Index, as tracked by EEM (iShares MSCI Emerging Markets, Expense Ratio 0.72%), and the fourth largest weighting in the FTSE Emerging Markets Index as tracked by VWO (Vanguard FTSE Emerging Markets, Expense Ratio 0.14%) at 8%. EEM, for instance, is down more than 1.6% in early trading and challenging its 50 day MA for the first time since mid-April on this unforeseen extreme weakness in the Brazilian equity market.
Year-to-date, fund flows have been healthy in EWZ (over $788 million in), but that was obviously before the precipitous drop today, and given the fact that no “Bear Fund” exists in the Brazil Equity space currently as we mentioned, there may be even additional pressure on EWZ not only from longs liquidating, but interested shorts taking aim at EWZ (which will become increasingly hard to borrow) today and in the near future.
Liquidity in the fund, given that there have been sporadic trading halts in the local Brazil market itself today as well as a continuous reel of new headlines, will be difficult in the fund and related (and smaller funds in the space), and thus execution dexterity in these markets will be significantly important for managers.
Before 10:30 AM EST, EWZ had already traded more than 73 million shares, versus its ADV of 14.8 million shares, so we will closely be watching net flows in this and related funds, including the broader Emerging Markets alternatives in the next several sessions.
The iShares MSCI Brazil Index ETF (NYSE:EWZ) was trading at $33.85 per share on Thursday morning, down $5.29 (-13.52%). Year-to-date, EWZ has gained 1.53%, versus a 5.85% rise in the benchmark S&P 500 index during the same period.
Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, Paul Weisbruch, does not endorse or recommend any issuer or security mentioned herein.
Paul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial. Prior to joining the team at Street One, Paul served as the Director of RIA and Institutional ETF Sales at RevenueShares ETFs from December 2007 until November of 2009. Before RevenueShares, Paul was employed by Susquehanna International Group from 2000 until 2007 serving in roles including OTC/NYSE Institutional Block Trading, Nasdaq/OTC Market Making, ETF/Derivatives Intelligence and Strategy, Algorithmic Trading, as well as acting as the PHLX Floor Specialist in the ETFs, SPY and DIA.Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and ETFTrends.com for instance.
He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.