ETF Momentum Tracker’s Choice Pays Off: iShares MSCI Brazil Index Remains Top International Portfolio Holding

ETF Momentum Tracker’s choice pays off: iShares MSCI Brazil Index remains top International Portfolio holding.

Williamstown, MA, June 27, 2008 --( When publisher Don Dion added EWZ to the ETF Momentum Tracker International Portfolio on May 2, 2007, no one could have predicted the fund’s NAV would be up 66.3% through June 20. EWZ has also held the top spot in Dion’s momentum rankings since February.

With a five-year annualized return of 55.6%, iShares MSCI Brazil has been the best-performing ETF tracked by Morningstar. The fund is also tops over three years (also 55.6%) and 14th among all ETFs, with a one-year return of 47.7%.
But EWZ stumbled over the last month, falling 11.3% (through June 20) to an eight-week low, thanks to a sell-off driven by concerns over global inflation and a potential dip in China’s demand for the commodities that drive Brazil’s economic engine.

The country’s benchmark market index, the Bovespa, is down 11% after posting a 186% gain from April 2005 to this month and a 500% increase in five years. Neither the index nor EWZ has fallen like China’s Shanghai Composite, which is off 50% from its October 2007 high.

When asked for the cause of the surge, Dion admitted that “EWZ’s run-up has—of course—been driven by the commodities boom.” The economy of Latin America’s largest country is dominated by energy and materials, putting Brazil in the stock market’s sweet spot of recent years.

Dion emphasized, however, that “Brazil has also shown strong economic growth, pushed by a booming middle class that’s helped the country’s economy grow.” Inflation remains relatively low (by South American standards), and Brazil’s currency, the real[cb1] , has rallied. Finally, in April and May, first S&P and then Fitch Ratings raised the nation's sovereign debt to investment-grade status, a sign of maturity, continued recovery and a decrease in the country’s debt.

All that, combined with a year-to-date return of 10.4% that places EWZ second among all iShares funds, has some investors banking on the fund for long-term success.

Of the BRIC (Brazil, Russia, India and China) countries with the hottest markets of recent years, bulls point to Brazil and Russia as economies that produce and sell the commodities that the world’s other rapid-growth stories need. And Brazil’s resources are more diversified.

EWZ, the only pure-play Brazil ETF, is certainly a play on the country’s commodity stockpile. Taking different share classes into account, its top two holdings, Petrobras and Cia Vale do Rio Doce (also known as Vale), make up more than 45% of the portfolio.

Before jumping on the bandwagon, It’s important to consider the fund’s risk and volatility. With a three-year standard deviation of 30.06, EWZ is, by that measure, the second-most volatile ETF in the Morningstar universe—behind only iShares FTSE/Xinhua China 25 Index.

Dion noted that “First, Brazil is truly an emerging market, a country that teetered on the verge of bankruptcy in 2002. Second, the economy is tied to commodity prices, and so is the fund, with nearly 60% of assets in mining or energy stocks. Finally, while the fund holds 79 stocks and has grown to nearly $10 billion in total assets, it remains heavily focused on a few key stocks.”

This month’s dip wasn’t the first for EWZ and likely won’t be the last. But pullbacks from risk and profit-taking sell-offs are a fact of life here. The bigger question is, what happens to EWZ if there is a slowdown in China or a global recession.

Bottom line, EWZ has a lot going for it in addition to those world-beating returns. But that run-up—and the risk that comes with it—means that the ETF should play a limited role in the portfolio of investors with the stomach to handle its gyrations.

EWZ (NAV) +/- Category*
YTD** 21.7% +6.5
2007 76.7% +30.8
2006 44.3% +1.2
2005 52.5% +1.1
2004 34.2% -6.3
2003 113.0% +42.6

*Category: Latin America Stock
**Through 10/31/07
Source: Morningstar

Top Ten Holdings*
Petroleo Brasileiro (Preferred) 14.09%
Petroleo Brasileiro SA 11.81%
Cia Vale do Rio Doce (Preferred) 10.85%
Cia Vale do Rio Doce (ADR) 8.90%
Banco Bradesco (Preferred) 4.97%
Banco Itau Holding Financiera (Prfd) 4.44%
Unibanco Units 3.36%
Cia Siderurgica Nacional 3.24%
Gerdau (Preferred) 2.64%
Usinas Sider Minas Ger (Preferred) 2.28%

*As of 5/30/08

About Don Dion:

About Don Dion:
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors Don’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Mr. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $770 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Don Dion will give his outlook for the second half of 2008 in a freeE video conference this Wednesday. Go to to register now.

Dion Money Management, LLC
Donald R. Dion
1-800-432-7447 ext. 191