The EWZ's Sharp Rise and Financial Market Analysis
The iShares MSCI Brazil ETF (EWZ), traded on the New York Stock Exchange (NYSE Arca), closed the last trading session before the second round of the elections with a cumulative gain of 13.87% in October. However, contrary to a gradual rally, virtually all of this gain was concentrated in a single event: Monday, October 5, immediately after the first-round results were tallied.
On that date, the EWZ ETF It surged 12.5% in a single day, reaching a price of US$ 43.54 the following week. The move reflected Wall Street’s reaction to the election results, in which candidate Flávio Bolsonaro (PL) led with 47.03% of the valid votes, followed by Luiz Inácio Lula da Silva (PT) with 45.16%.
According to the prevailing view among major international research firms, the results of the first round and the composition of a more conservative Congress signaled a greater likelihood of fiscal discipline and restraint on public spending. This scenario drove net inflows of US$ 700 million into the fund in a single day—the largest single-day inflow in the asset’s history—and a record trading volume of US$ 8.2 billion.
Why Doesn't the EWZ Exactly Track the Ibovespa?
Although it is commonly referred to as the “barometer of the Brazilian stock market,” the EWZ has its own structure that sets it apart from the Ibovespa index. Since it is priced in dollars, the fund offers dual exposure: the performance of the actions and exchange rate fluctuations.
In addition, its composition has different weightings than the domestic stock index. The ETF's largest holdings include the mining company Vale, the fintech company Nu Holdings (Nubank) and Itaú Unibanco, while Petrobras accounts for a smaller share (around 5% to 7%). During the transition between trading sessions, while the EWZ rose 14% in dollars, the Ibovespa in reais advanced 8.8%, buoyed by the real’s appreciation against the U.S. dollar.
The Options Signal: Protection Against a Drop and Volatility of 70%
Despite the cumulative rise at the beginning of the month, data from the derivatives market show that foreign investors have adopted a highly cautious stance ahead of the second round. The open interest in the EWZ options market reached a historic high of US$ 55 billion on the eve of the final vote, compared to about US$ 10 billion in the 2022 election.
With implied volatility near 70% and polls such as Datafolha indicating a virtual tie in voting intentions, institutional funds have stepped up their purchases of put options (put options) to protect their portfolios against a potential correction.
Analysts at UBS highlight the asymmetry of the current situation: if the election results defy the expectations priced into the initial rally, the market could experience significant profit-taking, with the dollar potentially reaching the R$ 5.40 range and risk assets facing heightened volatility.
Costs, Taxation, and What Investors Should Consider
For Brazilian investors considering allocating funds to EWZ as a means of international diversification, it is essential to analyze the product’s cost structure before making any decision:
- Management Fee: EWZ charges 0.591 TP3T per year, a higher cost than similar alternatives in the U.S. market, such as the FLBR ETF (0.19% per annum).
- Taxation and Foreign Exchange: Purchasing directly in the U.S. involves IOF on currency conversion, capital gains tax, and a 30% withholding tax on distributed dividends.
- Succession Risk: Assets held directly with U.S. brokerage firms by nonresidents are subject to U.S. estate tax on estates exceeding US$ 60,000.
Given that current prices have already factored in much of the market’s expectations for the first round, experts recommend avoiding short-term directional bets and focusing on maintaining a diversified portfolio across fixed income linked to inflation and uncorrelated global assets.
💡 Recommended Reading: Learn how to protect your assets during times of political volatility by reading our article on Investment Diversification.
The original information was reported by Exam.
