Getting 'Real' About Brazil ETFs

Among the plethora of problems plaguing Brazil ETFs this year has been the sagging real. Brazil's currency is one of the emerging world's worst performers against the U.S. dollar this year. At the end of January, $1 would have bought less than two real. Today, a greenback buys nearly 2.39 real.

Exacerbating the problem is high inflation and the ineffectiveness of interest rate increases courtesy of Brazil's central bank. Those problems trickle over to popular Brazil ETFs because these funds are not hedged, which means investors in those products are exposed to some level of currency risk.

Given the popularity of some hedged currency ETFs and the impressive returns thus far offered by the WisdomTree Japan Hedged Currency Fund (NYSE:DXJ) and the db X-trackers MSCI Japan Hedged Equity Fund (NYSE:DBJP), applying a similar approach to investing in other countries with volatile currencies is worth considering. At the very least in the case of Brazil, it can mean doing less bad than a unhedged strategy.

Enter the db X-trackers MSCI Brazil Hedged Equity Fund (NYSE:DBBR). DBBR tracks the MSCI Brazil US Dollar Hedged Index, the currency hedged answer to the MSCI Brazil 25/50 Index, the index tracked by the popular iShares MSCI Brazil Capped ETF (NYSE:EWZ).

Hedged currency ETFs do not prevent investors from being exposed to all of a country's fundamental flaws, of which there are a few in Brazil.

In fact, DBBR has larger allocations to some of the more controversial Brazilian large-cap than does EWZ. For example, DBBR allocates 13.6 percent of its weight to two Petrobras (NYSE:PBR) securities and 11.6 percent of its weight to Vale (NYSE:VALE), the world's largest iron ore producer, according to Deutsche Bank data.

By comparison, EWZ's weight to Petrobras is 12 percent and just over 10 percent to Vale. DBBR also has a slightly larger to bank stocks, 29.8 percent compared to 26.8 percent for EWZ. In favor of the currency hedged fund is a 23.4 percent allocation to consumer staples names, which is about 700 basis larger than EWZ offers.

DBBR also features a slight lower allocation to Brazilian utilities, which is a good thing considering that sector is seen as hampering the country's near-term dividend growth.

Importantly, the hedged currency index has been less bad than its unhedged counterpart. For the year-to-date period ending July 31, DBBR's index was down 12.5 percent compared to 19.2 percent for EWZ's index, according to issuer data provided to Benzinga.

DBBR features a gross expense ratio of 1.13 percent, but investors can defray some of that cost because the ETF can be traded commission-free on E*Trade.

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