Brazil ETF Finally Getting Help From Petrobras

Last year was not a bad time to own three of the four major ETFs tracking the BRIC nations.

That is to say investors would have down quite well with RIC instead of BRIC as the Market Vectors Russia ETF (NYSE:RSX), WisdomTree India Earnings ETF (NYSE:EPI) and the iShares FTSE China 25 Index Fund (NYSE:FXI) all performed quite well in 2012.

The laggard was the iShares MSCI Brazil Index Fund (NYSE:EWZ). Over longer time frames, EWZ has proven to be a thorn in investors' sides as well. Holding EWZ for the past 24 and 36 months means having held the second-worst performer of the four aforementioned ETFs.

A big reason for EWZ's woes in recent years has been problematic Petrobras (NYSE:PBR), a well-documented subject that investors in Brazil have become all too familiar with. To quickly recap, this has been the situation with EWZ and Petrobras, Brazil's state-run oil company.

As a market capitalization-weighted ETF, the largest Brazilian stocks by that metric will account for the largest percentage of EWZ's lineup. That has often a large, if not concerning weight to Petrobras. Concerning because over the past several years, Petrobras has been the worst-performing global oil stock listed on a major U.S. exchange.

Indeed, from March 10, 2008 through March 4, 2013, shares of Petrobras fell more than 69 percent. A far cry from the performances of Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE: RDS-A) or Total (NYSE:TOT) over the same time. This factoid really paints the picture of how much of a dud Petrobras has been over that time: Even BP (NYSE:BP), which had the worst oil spill in U.S. history to contend with in 2010, has performed better than Petrobras.

Fast forward to this week and things are suddenly looking for Petrobras. EWZ is liking the headlines as well. On Wednesday, Petrobras announced it raised diesel prices in Brazil five percent. That follows a January increase on gas prices of 6.6 percent and diesel increase of 5.4 percent.

The news is significant because unlike its major rivals, Petrobras has been unable to truly participate in oil's upside because the Brazilian government, the largest Petrobras shareholder, has kept a lid on the price increases the company can employ as a means of taming inflation.

Said another way: Petrobras says oil and oil-related products at below international market prices and that is one reason why the company reported its first quarterly loss in 13 years last year, according to the Financial Times.

News of the diesel price increase sent shares of Petrobras surging Wednesday. Credit Suisse liked what it saw and upgraded Petrobras to Outperform from Neutral today, calling the diesel price increase a "big step."

"This could be the beginning of a more benign Government attitude, trying to restore business confidence," Credit Suisse said in the note.

The upgrade has shares of Petrobras higher by nearly five percent today, which makes for a five-day gain of 21 percent. The trickle down effect to EWZ has been evident as well. EWZ, the largest ETF tracking Brazil, currently allocates about 11.5 percent of its weight to Petrobras, according to iShares data. The ETF has jumped nearly five percent in the past five days.

Obviously, EWZ has other tales that can wag its dog, such as Vale (NYSE:VALE) and a 27.5 percent allocation to Brazilian banks. That means the correlation between the ETF and Petrobras is not as intimate as some might think. For example, over the past two years, Petrobras has been nearly two-and-a-half times as bad as EWZ in terms of returns.

Still, EWZ's reputation for being Petrobras heavy positions the ETF nicely to take advantage of any ongoing rebound in the shares.

For more on EWZ, click here.

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