Most investors making an allocation to emerging markets are aware that this asset class tends to be one of the more volatile. They brace themselves for some significant short-term volatility, with the expectation that the long-term returns will exceed those of developed markets.
This rule of thumb generally holds — at least over long enough time horizons — but in many cases the short-term volatility is greater than investors may expect. Below are three charts illustrating the extreme volatility that Brazil ETFs have experienced.
Brazil vs. Mexico vs. S&P 500
The following chart shows the performance of the iShares MSCI Brazil ETF (EWZ) since its inception in 2000, along with the Mexico ETF (EWW) and the S&P 500 SPDR (SPY).
The U.S. stock market — which experienced two significant bear markets during this period — looks quite stable by comparison.
Currency Impact
Part of the volatility of Brazil ETFs relates to the currency exposure; the returns realized by U.S. investors reflect both changes in the local prices of the stocks and fluctuations in the exchange rates.
The following chart shows the performance of EWZ along with the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR), which hedges out the exposure to the Brazilian real.
Both ETFs performed terribly over this time period, but maintaining exposure to the Brazilian currency resulted in a significantly larger decline.
Sector Swings
ETFs offering exposure to specific sectors within Brazil can experience even greater volatility. The following chart shows the frequency with which the Global X Financials ETF (BRAF) has experienced weekly swings (both positive and negative) of at least 3 percent, 5 percent, and 10 percent:
This sector has experienced weekly swings of at least 3 percent nearly half the time. On average, Brazil’s financial sector will move by 10 percent or more in a week twice a year. Again, the U.S. counterpart — the Financial Sector SPDR (XLF) — looks quite stable by comparison. About once a month, Brazilian financial stocks will have a weekly gain or loss of at least 5 percent.
Brazil’s once compelling growth story has been derailed by plunging oil prices and a series of political scandals. Even if the country does get back on track and realize its full potential, the road forward will likely feature the same dramatic ups and downs that have been common in the past.
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