ETF Update: The Lure of Brazil

There is real enthusiasm about investing in emerging markets.  With so much negativity about the US economy and such low yields in bonds, nearly every commentator is recommending exposure to emerging markets.

A leading choice is Brazil.  There is strong growth and an emphasis on commodities.  Meanwhile, the upcoming election presents some risk — and a potential reward.  The retiring President universally known as "Lula" has proven to be both popular and pragmatic.  Elections always introduce uncertainty, and his hand-picked successor (who would be the first woman to be President) is not assured of victory.  A continuation of policies would calm foreign investors.  Here is a nice overview video from CNBC.



Traders all seek rewards but they have differing appetites for risk.  It is important to find a method that suits your personality and needs.  Our short-term trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation.  Since we apply the method to ETFs, we call it the TCA-ETF system.  We follow two versions of this method, designed for two hypothetical clients (Oscar and Felix) with different needs and risk appetite.  [New readers can find more information about the models at the end of this article.]  For convenience, we have named the models based upon the intended clients.

Featuring Brazil

We trade Brazil via the iShares MSCI Brazil Index Fund.  The fund is "large cap" and has 79 holdings, but that is a bit deceptive.  The top five holdings make up over 40% of the fund, and the top ten nearly 60%.  75% of the holdings reflect equal weightings in materials, financials, and energy.  The twelve-month yield (including all distributions) is 3.42%, but the SEC yield is 2.27%.  The P/E ratio is 19 — not so bad — but investors have to accept a beta of 1.5

Here is the chart.

Ewz oct 2010

We have very good strength, a solid trend, and a dip from the highs.  What next?


Other Opinions

We always survey commentary from other experts on the ETFs in our buy zone.  There are some interesting comments on EWZ.

  • The recent weakness is the result of a tax increase on foreign investors.  Check out the analysis at ETFdb.  The key issue is future policy implications – -still unkown.
  • While we trade the "large cap" Brazil fund, there are some who favor small caps.  Check out Andy Hart's explanation of why he prefers BRF.  Please note that we have a three-week time horizon, influencing our choice of universe.  This is an intersting argument.

This Week's Results

Felix, the cautious approach, has recognized the opportunity in the recent market rally.  The sector ratings have reflected the strength, and nearly everything is out of the penalty box.

We have done well with our recent picks, including retail (XRT), featured in our last article.

Oscar, the more aggressive approach, was even earlier in identifying EWZ.

Weekly TCA-ETF Rankings

We are currently fully invested in our Felix ETF program and also for those following Oscar.  (We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models, and a free weekly email update.  Write to etf at newarc dot com.  Our actual trading is a combination of both models and some weekly timing).

Please note that these are not recommendations.  Investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.  The recommendations can change quite rapidly in this environment.  It is quite possible for investors with different time frames to reach opposite conclusions about a specific trade.

Here are the current rankings for both Oscar and Felix.  I also note the nice moves in coal and semiconductors — perhaps emerging from the penalty box.

Felix 10-07-10

Oscar 10-07-10


Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  We also have free reports, available upon request to etf at newarc dot com.  These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit — thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

  • Oscar believes in the long-term strength of the economy and the stock market.  He has a lovable and irrepressible enthusiasm.  When things go wrong, he steps back for a bit, but soon tries again.  He expects to do better than others during good times.  Oscar understands that this approach involves more risk.  Oscar is opportunistic.
  • Felix also has a positive long-term outlook, but he is something of a fussbudget.  He is much more cautious, with an emphasis on capital preservation.  He is perfectly willing to step aside from the market when there are signs of danger.  He knows that he will miss some moves, but that is OK.  He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.

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