Why The Brazil ETF Wreaks Of Value Trap (EWZ, SPY, PBR, VALE, BP)

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August 10, 2011 12:51pm NYSE:BZQ NYSE:EWZ

Todd Shriber:  Every now and then even the savviest of investors fall into the value trap. They buy an ETF or stock that, in their view, has been unjustly punished. To be sure, this market environment has provided investors with no shortage of punished ETFs. That’s a good news/bad news equation.


 The good news being that a lot of fine ETFs are now on sale. The bad news is there are also a lot of tempting choices that are going to struggle to regain their lost luster.

I don’t think I’m going out on a limb by saying this, but I have a feeling that I may irk a few readers by saying the iShares MSCI Brazil Index Fund (NYSE:EWZ) smacks of value trap right now. Yes, I know I’m saying this AFTER EWZ put in a nice move higher on Tuesday. I’ll also fully acknowledge that Russ Koesterich of iShares put an overweight rating on Brazil earlier this week.

Count me among his fans and count me among those that want to like Brazil and EWZ. I just can’t do it right now. In his Monday piece, Koesterich notes Brazil is potentially a big winner as the global slowdown eases inflationary pressures. This is only part of the EWZ trap at the moment. Eight interest rate hikes in the past 15 months by Brazil’s central bank have delivered this amount of lag versus the SPDR S&P 500 ETF (NYSE:SPY):

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Put another way, if you’ve felt like Beijing has struggled to contain inflation this year, policymakers in Sao Paulo have struggled even more mightily than their Chinese counterparts. Alright, so that’s talking about Brazil in broader terms, but let’s drill down on why EWZ is still a major risk even below $60.

That sentiment can be expressed in terms of two stocks: Vale (NYSE:VALE) and Petrobras (NYSE:PBR). Combined, various securities issued by those companies account for about 35% of EWZ’s weight. In the case of Vale, the world’s largest iron ore producer, a true global economic slow down means customers such as China are going to purchase less iron ore. On its own, that would be a hurdle for EWZ to overcome.

Next, investors simply cannot ignore Petrobras and I don’t mean that in a good way. I could regale you with words, but I’ll let the chart do the talking.

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That chart shows Petrobras has been such a stinker in recent months, even BP (NYSE:BP) has sharply outperformed the Brazilian oil giant. Put another way, if you wanted own a major integrated oil stock, the four U.S. and the three European majors, BP included, are all better options than Petrobras.

Will Brazil rise again? Yes, it will, but more value awaits the patient investor. Those with itchy trigger fingers would do well to avoid Brazil-specific ETFs that are heavy on Petrobras and they should consider hedging those positions with short-term trades in the ProShares UltraShort Brazil (NYSE:BZQ).

Best Wishes,

Written By Todd Shriber From Global Profits Alert

Todd Shriber is an ETF fanatic, a former hedge fund trader, and a journalist. Todd started his professional career with Bloomberg News, where he covered banks, energy and technology.  After leaving Bloomberg, Todd became a trader at a California-based hedge fund where he specialized in trading financials, energy, basic materials, and ETFs.

This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc. GlobalProfitsAlert.com publishes information on Investing in the China stock market and emerging markets, dividend stock and income investing, exchange traded funds (ETFs), green energy stocks, technology stocks, global market trends and other investment information. To view archives or subscribe, visit http://www.globalprofitsalert.com/


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