Looking for Better Returns? 5 Ways to Invest in Brazil

Brazil is known for tourist attractions, its natural beauty and soccer. The former Portuguese colony is also a thriving multicultural country — a melting pot not unlike the United States. The origins of its population can be traced to countries all over the world. It is the largest economy in Latin America, and the ninth-largest in the world.

A variety of investment opportunities originate in Brazil. It has deep local stock and debt markets. Large Brazilian debt issuers regularly tap local and foreign markets, including the United States.

Below I describe five different investment instruments providing access to the country.

iShares MSCI Brazil Capped ETF (EWZ)

This ETF tracks the MSCI Brazil 25/50 Index. The index is capitalization-based. Single issuers weighting is capped at 25%. The sum of issuers weighting above 5% is capped at 50%. Options on the ETF trade with expirations up to January 2023.  

It currently trades at 30% of its highest historical value, reached more than a decade ago. Most of its long-term decrease in value can be attributed to currency performance, and a swift drop from its peak.

It also had periods of sharp appreciation. Its value doubled from 2016 to 2019, before collapsing early this year.

USD-denominated sovereign bonds

The sovereign is an active issuer of U.S. dollar bonds, sold internationally. The bonds are not exchange listed. Trading the bonds may require a relatively specialized broker.  

Like U.S. Treasuries, Brazilian sovereign bonds have semiannual interest payments (coupons) and a single principal payment at maturity.

Sovereign debt is currently rated Ba2 by Moody’s and BB- by S&P, which is below investment grade.

Five-year bonds currently yield 2.6% and 10-year ones 3.90%. The long-term bond maturing in 2050 currently yields 4.80%, more than 3% above 30-year U.S. Treasury bonds.

Quasi-sovereign and corporate bonds

Large Brazilian corporations also issue international debt, available to U.S. investors.

The government owns a large percentage of some corporates. These issuers debt can have a level of government support but is not explicitly guaranteed by it.  Such companies are referred to as quasi-sovereigns.

The best known is Petroleo Brasileiro — Petrobras (PBRA), a large national oil firm.

Quasi-sovereign bonds additional credit risk is compensated by higher yields than those of sovereign bonds. USD-denominated Petrobras bonds are currently rated Ba2 by Moody’s and BB- by S&P, below investment grade.

10-year bonds currently yield 4.25%. The longest bond yields more than 6% and matures in a century.   

Well-known corporate issuers include Itau Unibanco Holding (ITUB), Banco Bradesco (BBD), Vale (VALE).

Brazilian ADRs

ADR stands for American Depositary Receipts. The instruments are traded and settled in U.S. markets but are backed by foreign stocks. U.S. financial institutions custody and repackage underlying stocks into certificates traded in the United States.

ADRs forego the need for opening accounts abroad or directly dealing in foreign currency. Underlying stock dividends are usually converted into U.S. dollars and distributed to U.S. ADR holders.

ADRs value depends on stock prices in the country of origin, and the relative value of foreign currency to US dollars — in this case the Brazilian real.

Investments in ADRs leave room for more active investment and customization than ETFs.

Example of Brazilian ADRs are Bradesco (BBD), Banco Santander (Brasil) (BSBR), Itau (ITUB), Petrobras (PBRA) and GOL Linhas Aereas Inteligentes (GOL).

Local currency bonds settled in USD

Brazil’s legal tender is the Brazilian real. Its price against the U.S. dollar is actively traded in spot, futures and over-the-counter markets.

The Central Bank of Brazil (BACEN) calculates a daily trading average of the currency value against the U.S. dollar, which is used to cash settle currency linked transactions in domestic and foreign markets.

Deep local markets exist for Brazilian Real denominated debt. A niche market also exists for Brazilian Real denominated debt settled in USD. It provides domestic currency and yield exposure to foreign account holders.

Issuers include the sovereign, local corporates, and banks. Benchmark USD settled BRL sovereign bonds currently yield 6.7% and mature in 2028.