Brazil ETFs sink after Lula’s runoff win; EWZ falls 23.8%, erasing its election rally
Brazil stocks post worst day in over six years; currency collapse turns 18% local loss into 25% loss for dollar-based investors
Key takeaways
BlackRock's iShares MSCI Brazil ETF, EWZ, the largest US-listed Brazil fund, fell 23.8% in the week ending Oct. 30, after President Luiz Inácio Lula da Silva won a fourth term in the runoff on Sunday, Oct. 25. Every other US-listed Brazil fund fell as well.
EWZ fell to $32.46 from $42.59 the Friday before the runoff
In the week through Oct. 9, after the first round on Oct. 4, EWZ rose 14%. On Oct. 23, the Friday before the runoff, it was still 11.5% above its Oct. 2 close.
By Oct. 30 the fund was 15% below that close. A holder lost the entire first-round gain, and then some.
How the election surprised the markets
Flávio Bolsonaro, a senator and the son of former President Jair Bolsonaro, led the Oct. 4 first round with 47% of valid votes to Lula’s 45.2%. Investors bought Brazilian stocks on bets that he would win and rein in government spending. Lula then won the runoff 51.8% to 48.2%, according to Brazil’s Superior Electoral Court. No candidate had come from behind to win a runoff since 1989, Brazil’s first direct presidential election after military rule.
Investors now want to know how Lula will handle Brazil’s budget. They are watching two things: his choice of finance minister, and the central bank’s interest-rate decision on Nov. 4. The bank’s benchmark rate, the Selic, currently stands at 13.75%.
Stocks and Brazil's currency, in one price
EWZ investors took two hits: falling Brazilian stocks and a weaker real reduced the value of their holdings in dollars. Brazil’s benchmark Ibovespa index fell 18.1% in the week ended Oct. 30, its worst week since March 2020.
The dollar rose 9% against the real, Brazil’s currency, its biggest weekly gain since October 2008. In dollar terms, the Ibovespa lost about 25%. EWZ, which tracks a different index, the MSCI Brazil 25/50, fell 23.8% for the week.
Monday did most of the damage. The Ibovespa fell 13.9%, its largest one-day drop since March 2020, and the dollar jumped 8.2% that day, its biggest one-day rise since Jan. 13, 1999. EWZ fell 19.8% that day.
Other Brazil funds
Franklin Templeton's Franklin FTSE Brazil ETF, FLBR, fell 24.1%, in line with BlackRock's fund.
Smaller companies fell harder. BlackRock's iShares MSCI Brazil Small-Cap ETF, EWZS, lost 37%. VanEck's Brazil Small-Cap ETF, BRF, lost 35.8%.
Small-cap Brazil funds lost more than 35%
Why did BRZU lose more than double the Index?
Direxion Daily MSCI Brazil Bull 2X ETF, BRZU, fell 45.6%.
Before fees, BRZU seeks to capture twice the daily return of the MSCI Brazil 25/50 Index. But as the fund's prospectus warns, results over longer periods will likely differ.
This week illustrates why: On Monday, BRZU fell 39.4%, about twice EWZ’s 19.8% drop. Over the next four sessions, EWZ fell another 4.9% and BRZU fell another 10.1%, again about twice the EWZ return.
But BRZU took that second loss on a smaller balance. Each dollar invested on Friday was worth about 61 cents after Monday, so the 10.1% drop cost about 6 cents of the original dollar. BRZU ended the week down 45.6%, short of the 47.6% that a simple double of EWZ’s loss would suggest.
The same arithmetic helped the fund on the other side of the trade. ProShares UltraShort MSCI Brazil Capped, BZQ, seeks twice the opposite of the index’s daily return. It rose 54.5%, more than twice EWZ’s drop.
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