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A Bounce For Beaten Up Brazil Could Be A Boon For This Exciting ETF

Sarcastically speaking, congratulations are in order for Brazil, Latin America's largest economy. At a time of sagging emerging markets equities, stocks there are performing even more poorly. In fact, Brazilian equities are among the worst in the world thi

Benzinga · 05/22/2020 13:41

Sarcastically speaking, congratulations are in order for Brazil, Latin America's largest economy. At a time of sagging emerging markets equities, stocks there are performing even more poorly. In fact, Brazilian equities are among the worst in the world this year.

What Happened

Don't look now, well, maybe look, but the MSCI Brazil 25/50 Index is higher by 9.59% over the past week. The Brazilian benchmark jumped more than 4% on Thursday after the country's central bank said it stands ready to support the flailing real currency.

Should this rally prove sustainable over the near-term, active traders are sure to find some allure with the Direxion Daily MSCI Brazil Bull 2X Shares (NYSEARCA: BRZU).

Why It's Important

BRZU attempts to deliver double the daily returns of the MSCI Brazil 25/50 Index, which is actually a testament to the volatility that comes along with Brazilian stocks. Once upon a time, BRZU was a triple-leveraged ETF, but during the March market meltdown, Direxion lowered the leverage on the fund amid a spike in broader market volatility.

With the MSCI Brazil 25/50 Index historically more volatile than the MSCI Emerging Markets Index by wide margins, double leverage is enough and should get the job if Brazilian stocks rally further, which Goldman Sachs is forecasting will happen.

The bank called Brazilian equities the “ideal bounceback candidate” in projecting 9% for the benchmark Ibovespa index from current levels. That's not BRZU's index, but 9% upside there could translate to close to 20% upside for the Direxion fund.

BRZU, which was also reverse split in March, jumped 8.67% yesterday on volume that was nearly double the daily average.

What's Next

To be sure, Brazilian stocks, with or without leverage, aren't an easy trade, underscoring the point that BRZU isn't for the faint of heart.

“Investors have fled from Brazilian stocks and its currency this year as the Covid-19 pandemic battered the economy and worsened the nation’s already-fragile fiscal outlook,” according to Bloomberg. “Assets have been further undermined by political turbulence and a lack of confidence in President Jair Bolsonaro as he downplays the coronavirus threat even as Brazil becomes the world’s hotspot for new infections.”

Bottom line: if Brazil can reduce materially reduce its number of COVID-19 cases and deaths over the near-term, its equity markets will likely be responsive, perhaps providing a spark for BRZU.