Vanguard Mid Cap ETF: Cheap Valuations And High Quality (NYSEARCA:VO)


In this world nothing can be said to be certain, except death and taxes. – Benjamin Franklin

The Vanguard Mid Cap ETF (VO), a fund that is focused on mid-cap US stocks, has not been loved in recent years. It has had an impressive Covid-recovery, finally turning positive for the year, but remains below all-time highs made in February. Of course, this is not new for mid-cap investors. In the last three years, despite overwhelmingly positive equity markets and a risk-on sentiment, mid-caps have outperformed large caps, as measured by the Vanguard S&P 500 ETF (VOO). And by a significant amount, with a gain of 47.29% for the latter in the last 3 years to a gain of only 29.38% for the former.

Looking at the holdings of the ETF, the top 10 holdings account for only 8.1% of the portfolio, as much of the company-specific risk has been diversified away. Sector-wise, the holdings are balanced, with the top 3 sectors being Technology (21%) Financials (20.6%), and Industrials (15.3%). That gives a nice balance to the ETF in growth industries and value industries, which lets you hedge out the bet on which strategy will win out over the long term after more than a decade of growth stocks flourishing. Eventually, value investing can return, and you will have exposure to those types of companies with this holding.

Source: Vanguard

Thoughtful Selections

While the Covid crisis has many challenges for the mid-cap space, the portfolio has some excellent picks. For example, Lululemon Athletica Inc (LULU) is in a unique position, as their demand has likely increased with more consumers looking for comfort while working from home, a trend that the athleisurewear company has been excellent at capitalizing on. DexCom Inc. (DXCM) recently smashed earnings expectations in late July, with revenues gaining 34%, and earnings up a whopping 541%. SBA Communications (SBAC) managed to keep their dividend and beat FFO by $0.45, also beating on revenues, in their recent earnings report as more internet was used during the stay at home period. These, among other mid-cap plays, are extremely interesting in the ability to pivot and capitalize in a poor economy and should rebound stronger if the economy can continue its up leg.

Potential Risks

  1. If the economic recession is worse than thought, mid-caps may not have enough resources to weather the storm. Bankruptcies have been happening at an increased rate, especially when you go down the capitalization ladder, and could pose trouble throughout the rest of 2020 and into 2021, especially if government stimulus fails to gain traction in Congress. Many of these companies depend on a strong consumer.
  2. The dividend yield of VO could be under pressure here, especially if there is some movement on the political side to halt buybacks and shareholder payouts. While this remains a far-off risk, it is not implausible, and should be discounted as a risk when investing in these companies. With balance sheets that are inferior to larger-cap companies, there could be more pressure to keep free cash flow for future economic pullbacks and/or business pressure, lowering the dividend yield.
  3. This holding has 357 holdings currently, with a median market cap of $18.9 billion. While you are not going to be worried about diversification, you may suffer the effect of over-diversification with that many holdings. There have been studies done that say the proper amount of holdings for accurate diversification should be around 20-50 holdings only – at 357, the number is much higher.
  4. General market risk remains high after a Federal Reserve (Fed) fueled rally in 2020 off the March lows. If the Fed fails to stoke inflation, or they do not provide enough stimulus, stock markets are at risk of another major pullback. We saw some of this in the price action in early September, when tech stocks spurred a significant decline.

The ETF VO, and its underlying holdings, have shown a great ability to weather a downturn in the recent months. Although valuations remain elevated, at 25.3x P/E, the earnings growth rate of 13.7% should make up for that level over time. This is a great fund to get domestic exposure, as its foreign direct exposure remains 0%, and with a relatively low turnover of 15.2%, you should be comfortable holding this ETF long term.

While highly diversified, there are enough excellent ideas within the portfolio that can push the ETF to new highs, eventually. Whether the overall economy and markets remain in their uptrend is a huge question, but if you are looking for a 10- to 20-year investment, VO fits the bill. The nimbleness of mid-caps should allow them to adjust to the new normal economy, and if there is progress on a vaccine in late 2020 or early 2021, many will flourish.

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Convertible Closed-End Fund And ETF Review


Written by George Spritzer, co-produced by Alpha Gen Capital

(This report was sent to members of Yield Hunting on Aug. 17. All data herein is from that date.)

Investors are currently uncertain about the market’s future direction. Should you go into “risk on” mode with high equity exposure in the hope of a V-shaped recovery or instead play a defensive game with more bond holdings?

Another option is to take a middle of the road position with a single investment class – convertible bonds. Convertible bonds have, historically, provided some equity exposure but with higher yields and less risk of a large drawdown than with most stocks.

There are three different kinds of convertibles:

  1. Busted convertibles: These are convertibles that are way “out-of-the-money”. They behave much more like bonds than stocks. They have higher yields and little or no equity upside potential. These convertibles trade with a very high premium over conversion value – sometimes 100% or higher.
  2. Equity-Like Convertibles: These are the opposite of busted convertibles. They are way “in the money”, have low yields, and tend to trade very closely with the underlying equity. They trade at a very low premium over the equity conversion value or even at a slight discount for liquidity reasons.
  3. Balanced Convertibles: These have both equity and fixed income characteristics – Their value goes up and down when the underlying stock price changes, but their debt-like structure creates an implicit floor price and dampens the volatility. They generally trade at a medium size premium over equity conversion value in the 20-50 percent range.

Since convertible bonds are specialized instruments, mainly traded by institutional investors, many retail investors are probably better off buying a convertible fund rather than try to pick individual issues themselves. In this article, I discuss a few alternatives in the closed-end fund and ETF universes.

In the tables below, I’ve listed a selection of CEFs and ETFs that have exposure to convertible securities.

For the closed-end fund table, I list the baseline expense ratio, current discount to NAV, 52-week average discount, percent exposure to convertible securities, and year-to-date performance.

For the ETF table, I list the expense ratio, percent exposure to convertibles, and year-to-date performance.

Convertible Closed-End Funds

Ticker

Baseline Expense Ratio

Discount

52-week Average Discount

% Cvt. Exposure

2020 YTD Price Perf.

2020 YTD NAV Perf.

AVK

1.57%

-12.25%

-10.57%

56%

– 2.58%

+ 0.32%

BCV

1.30%

– 9.04%

– 7.55%

93%

+5.56%

+15.10%

CCD

1.50%

– 8.30%

– 2.21%

86%

+14.98%

+26.46%

CHI

1.22%

– 8.85%

– 4.21%

66%

+10.03%

+19.25%

CHY

1.22%

– 7.64%

– 3.90%

63%

+13.38%

+19.62%

ECF

1.20%

– 7.15%

– 7.00%

78%

+ 8.02%

+15.11%

NCZ

1.41%

– 9.79%

– 4.48%

59%

-10.52%

– 1.66%

Convertible ETFs

Ticker

Expense Ratio

% Cvt. Exposure

2020 YTD Perf.

Size in MM

CWB

0.40%

75%

21.00%

5,100

FCVT

0.95%

79%

19.10%

270

ICVT

0.20%

94%

25.31%

892

The three ETFs listed above focus primarily on convertibles. The SPDR Bloomberg Barclays Convertible Securities ETF (CWB) is the largest of the three and was launched in 2009. It invests around 75% in convertibles with most of the remainder invested in preferred shares. CWB tracks a market-value weighted index of US dollar convertibles with par amount outstanding above $250 million.

The First Trust SSI Strategic Convertible Securities ETF (FCVT) was launched in 2015 and is actively managed, which explains its higher expense ratio. It can also invest in non-US dollar issues.

Perhaps the best choice of the three convertible ETFs for buy and hold investors is the iShares Convertible Bond ETF (ICVT) which was launched in 2015. It invests almost exclusively in convertible bonds and has the lowest expense ratio of only 20 basis points. The fund’s index buys US-dollar denominated issues with par amount outstanding of $250 million or more.

Convertible Closed-End Funds – Short Capsule Reviews

Thus far in 2020, the convertible ETFs have had better performance than the convertible closed-end funds. Some of this is due to higher expenses, but most of the performance difference can be explained by widening of the CEF discounts. I’ve briefly reviewed some potential closed-end fund choices below.

Advent Claymore Convertible Securities and Income (AVK)

Fact Sheet

This leveraged fund has the highest discount in the group above and also has the highest expense ratio. Performance has been below average. As of June 30, its highest sector allocations were in technology, consumer discretionary, and health care. The fund also has a fairly low exposure to convertibles of 56%. I would pass on this fund now but would consider it for a trade if the discount rose to 14% or higher.

Bancroft Fund (BCV)

Fact Sheet

This leveraged fund has a long history and was founded in 1971. It was acquired by Gabelli Funds in 2015. BCV is more of a “pure play” fund and has a high 93% convertible exposure. The top sector allocations are in Computer Software and Services, Health Care, and Financial Services. BCV is a reasonable buy now at a 9% discount and would be a strong buy at a 12% discount or higher.

Calamos Dynamic Convertible and Income (CCD)

Fact Sheet

This leveraged fund has the best NAV year-to-date performance among its CEF peers in 2020. Its top three holdings are convertible bonds of Tesla (NASDAQ:TSLA), Splunk (NASDAQ:SPLK), and Microchip Technology (NASDAQ:MCHP). Its top three sector allocations are in Information Technology, Consumer Discretionary, and Health Care. CCD pays out a consistent $0.167 monthly distribution which has remained steady since the fund’s inception in 2015.

CCD is attractive now at an -8% discount since its 52-week average discount is only -2%.

Calamos Convertible Opportunity Income (CHI)

Fact Sheet

This leveraged Calamos fund is somewhat similar to CCD, but it has a lower exposure to convertibles at 66% and more exposure to corporate bonds. Its expense ratio is somewhat lower than CCD, but its year-to-date NAV performance is also somewhat lower. Its top three sector allocations are Information Technology, Consumer Discretionary, and Health Care. Its top three holdings are also in convertible bonds of Tesla, Microchip Technology, and Splunk.

CHI is fairly attractive now at an -8.8% discount, with its 52-week average discount at -4.5%. I would probably give a slight edge now to CCD, but that can vary on a day to day basis.

Calamos Convertible & High Income Fund (CHY)

Fact Sheet

This is a leveraged multi-sector fund with exposure to convertibles and high yield. Its expense ratio and year-to-date NAV performance are quite similar to CHI which is somewhat of a “sister” fund. Its top three sector allocations are Information Technology, Consumer Discretionary, and Health Care. Its top three holdings are also convertible bonds of Tesla, Microchip Technology, and Splunk.

CHY is also a decent buy now at an -7.6% discount versus its 52-week average of -3.9%. But I would currently give a slight edge to CHI or CCD.

Ellsworth Growth & Income Fund (ECF)

Fact Sheet

This leveraged fund has a long history and was founded in 1986. It was also acquired by Gabelli Funds in 2015. ECF is somewhat similar to its sister fund BCV, but it is less of a “pure play” convertible fund and has some exposure to straight equities. The top sector allocations are in Computer Software and Services, Health Care, and Energy & Utilities. I would pass on ECF now but would consider it for a trade if the discount rose to 9% or higher.

AllianzGI Convertible & Income Fund II (NCZ)

Fact Sheet

NCV is a leveraged multi-asset fund that invests primarily in domestic convertibles and non-convertible high-yield bonds below investment grade. The top sector allocations are in Information Technology, Financials, and Communication Services.

Its performance has lagged somewhat in 2020 compared to some of its convertible CEF peers. The lagging performance has likely occurred because the fund has little or no exposure to hot convertible growth issues like Tesla or Splunk. I would pass on NCV for now but would consider it for a swing trade if the discount rises to 10% or higher.

Overall Assessment

At the present time, I would consider the ICVT ETF to get convertible exposure for longer term buy and hold investors. For more active closed-end fund traders, I would currently prefer BCV and CCD, but other candidates are similar, and valuations can vary on a day to day basis.

Disclosure: I currently do not own any of the funds in this article, but am considering a purchase of one or more in the near future.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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SILJ ETF Top 10 Holdings And Their Mining Jurisdictions – 2020 Edition (NYSEARCA:SILJ)


I’ve recently started dissecting various silver and gold mining ETFs to break down their jurisdictions for investors. Even though many investors use ETFs, most investors have appreciated knowing in what countries their ETFs, such as SLVP are invested. Of course, the holdings inside of ETFs change continually, but taking a snapshot in time can be helpful.

Brief Discussion of the Problem

This may cause some of you to pose the question, “Why is jurisdiction so important? Why now?” From a high level, the answer to that question is the same answer for why you invest in gold and silver in the first place. In times like these, capital preservation becomes a top priority. It becomes a higher priority because uncertainty lurks around every corner due to perceived instability among governments and economies.

When governments are unstable, and the economic system is unstable, then gold becomes the answer to fiat currency problems for individuals and potentially for governments as well. And when governments around the world need gold, they may take drastic measures to get it.

To drill into the finer details of the issue, I’ve written extensively in an article related to GDXJ jurisdictions. Please read that article, rather than me write about it here again.

ETFMG Prime Junior Silver Miners ETF (SILJ) – Top 10 Holdings And Their Jurisdictions

#1 – Pan American Silver (PAAS) – 12.73%

Source: Pan American Silver FY2019 Annual Report

#2 – First Majestic Silver (AG) – 10.51%

Source: First Majestic Silver FY2019 Annual Report

#3 – Hecla Mining (HL) – 10.36%

Source: Hecla Mining FY2019 Annual Report

#4 – Yamana Gold (AUY) – 6.04%

Source: Yamana Gold FY2019 Annual Report

#5 – Silvercorp Metals (SVM) – 4.94%

Source: Silvercorp Metals FY2019 Annual Report

#6 – Hochschild Mining (OTCPK:HCHDF) – 4.71%

Source: Hochschild Mining FY2019 Annual Report

#7 – MAG Silver (MAG) – 4.53%

Source: MAG Silver FY2019 Annual Report

#8 – Harmony Gold (HMY) – 4.43%

Source: Harmony Gold FY2019 Annual Report

#9 – SilverCrest Metals (NYSEMKT:SILV) – 4.10%

Source: SilverCrest Metals FY2019 Annual Report

#10 – SSR Mining (SSRM) – 3.70%

Source: SSR Mining FY2019 Annual Report

SILJ Top 10 Holdings and Their Jurisdictions – 100%

Conclusion

The ETFMG Prime Junior Silver Miners ETF can be an excellent way to diversify one’s silver holdings. I find it interesting that this ETF is labeled as “junior” silver miners, but you find many of the same holdings in the Global X Silver Miners ETF (SIL) or the iShares MSCI Global Silver and Metals Miners ETF. However, each one of these ETFs do have slightly different holdings. Thus it can be good to study each of their jurisdictions and invest accordingly.

Keep in mind that these holdings do and will change quite frequently within the ETF. However, it is likely only the different percentages of each holding will change, while the holdings themselves likely won’t change very much.

Here are some notes from the above analysis as well as from previous analysis.

  1. At least 24 percent of this ETF’s revenues come from Mexico. If you invest in this ETF, you may want to search for silver exposure with other jurisdictions in your other holdings. Even though Mexico is a good jurisdiction, it’s still good not to have all eggs in one basket. As an example, First Majestic recently ran into tax issues with Mexico. Whether this was a mistake committed by First Majestic, or the Mexican tax authorities grinding an ax with First Majestic remains to be seen. That said, Mexico is the largest silver-producing country in the world which can make finding other jurisdictions challenging.
  2. The fifth-largest jurisdiction in this ETF is China via Silvercorp Metals at almost 5 percent. With the way China-U.S. relations are at the moment, it is important to be aware of this. It seems like new headlines appear daily for relations worsening between the two nations.
  3. The SILJ and the SLVP ETFs were more diversified in their top 10 holdings relative to SIL. Its top 10 holdings made up 66 percent of its total holdings while the SIL ETF’s top 10 made up 77 percent of its total holdings. The SLVP ETF’s top 10 holdings made up roughly 66 percent of its total holdings as well. Depending on the holdings themselves, this could be a good thing or a bad thing. More research needs to be done, but I wanted to draw this to investors’ attention.
  4. As with most gold and silver ETFs, one has to beware of Harmony Gold’s Papa New Guinea and South Africa holdings. Papua New Guinea recently made an interesting move on Barrick Gold’s Porgera mine which they are in the middle of hopefully resolving. Although it’s unlikely anything would happen, South Africa is also a nation that can sometimes be volatile.
  5. When comparing SILJ to SLVP, it’s evident that SLVP tries to live up to its name by being more “global” in its holdings. In its attempt to be more global, it opens the door to risk from countries that SILJ and SIL do not have.

If a precious metals mining ETF like SILJ is part of your portfolio, then knowing what it holds can allow you to be more selective in your other holdings. Or if owning this ETF knowing 5 percent of your holdings are China makes you not want to own it, then maybe consider owning some of the individual silver mining stocks that are inside the ETF. Clearly, stick with the ones with positive fundamentals, good leadership, and attractive jurisdictions.

To share some of my specific thoughts, I prefer Pan American Silver although it has had an incredible run of late. It would wise to wait for a pullback. I also like MAG Silver for its strong prospects from its Juanicipio joint venture with Fresnillo (OTCPK:FNLPF). I also like Wheaton Precious Metals (WPM) which is a gold and silver streamer. Although Wheaton’s jurisdictions are heavily weighted toward Brazil which is cause for some caution, I like Wheaton better for its revenue product mix and its relative valuation. But I do like Franco-Nevada (NYSE:FNV) better for its jurisdictions.

As silver prices continue to rise, keep in mind that we will start to see some outperformance from the marginal silver producers. One in the list above that gets most of its production from the United States (and Canada) is Hecla Mining. Just as one example, I would expect its stock to perform very well relative to others in this list if silver prices continue on this trajectory.

There’s a lot of different ways to play it, but eliminating jurisdiction risk can be one way to help you sleep better and potentially increase returns as well.

Disclosure: I am/we are long PAAS, MAG, AG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author of this article is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author of this article expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.





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TGIF Is the Ticker for a New Bond ETF Touting Friday Payouts By Bloomberg


© Reuters. TGIF Is the Ticker for a New Bond ETF Touting Friday Payouts

(Bloomberg) — Investors looking for more frequent bond payouts may soon have the option to buy an exchange-traded fund that will distribute cash every Friday.

The SoFi Weekly Income ETF will trade under the ticker TGIF and focus on investment-grade and high-yield corporate bonds, according to a filing with the Securities and Exchange Commission. The fund will be actively managed and primarily hold securities maturing in less than three years.

The Friday payouts could be an attempt to attract older investors looking for more frequent income payments, according to Eric Balchunas, a Bloomberg Intelligence ETF analyst. Most bond ETFs have monthly distributions, he said.

TGIF’s debut would also add further momentum to one of the hottest trends in the ETF market. Actively managed ETF launches are outpacing passive for the first time in 20 years. As of Thursday, 68 active exchange-traded funds had started trading in 2020, compared with 63 passive ones, according to data compiled by Bloomberg.

©2020 Bloomberg L.P.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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Coronavirus Beaten Down Stocks/Funds Series – iShares MSCI Brazil ETF (NYSEARCA:EWZ)


This article first appeared in Trend Investing on June 9, 2020; therefore all data is as of this date.

In this ‘coronavirus beaten down stocks/funds’ series of articles I have looked at both stocks and funds that have been beaten down due to the COVID-19 (coronavirus) market sell-off. Given that most global stock markets are well on the way to recovery now, this will most likely be the last article in this very successful series.

Today I look at Brazil, a market that has been heavily sold off and is now bouncing up after recently hitting a low (similar to the post GFC low in 2009), and trades on a PE ratio of 11.7 and a dividend yield of 4.49%. Brazil has been the second worst hit country by COVID-19, perhaps explaining the delayed recovery of their equity market. The Brazilian Real has also been heavily sold down.

Brazil

Source: Wikipedia

iShares MSCI Brazil (EWZ) – Price = USD 33.27

As shown on the charts below the EWZ fund has recently bounced up, but is still only just above where it was back in 2009 at the end of the GFC. The past decade of falling oil and commodity prices has hurt Brazil. The fund is down 33% in 2020.

iShares MSCI Brazil (EWZ) 25 year price chart (in USD)

Source: Yahoo Finance

iShares MSCI Brazil ETF – 20 year performance chart (in USD)

Source: iShares MSCI Brazil ETF

A look at what drives the Brazilian economy

Brazil has a population of ~211 million and their 2020 GDP is currently forecast at -5.3%, rebounding in 2021 to 2.89%. GDP per capita in 2019 was US$17,016. The current unemployment rate is ~13%, reserve bank interest rate 2.25%, 10 year bond rate 6.93%, inflation rate 1.9%, Government debt to GDP 86%, and the currency [USD:BRL] is 4.82.

Brazil GDP and forecast GDP

Source: Statista

The Brazilian Real is currently very weak to the USD at 4.82

Source: Trading Economics

According to Wikipedia:

Brazil is classified as an upper-middle income economy by the World Bank and a developing country, with the largest share of global wealth in Latin America. It is considered an advanced emerging economy. It has the ninth largest GDP in the world by nominal, and eight by PPP)”>PPP measures. It is one of the world’s major breadbaskets, being the largest producer of coffee for the last 150 years.

Brazil has both a services economy and an export economy. According to 2014 estimates, 5.8% of Brazil’s income came from agriculture, 23.8% from industry, and 70.4% from services.

Exports are dependent on the shipments of raw material (50% of total exports) and manufactured goods (36%).

Brazil’s main exports are: Soybeans and related soy products (17%); oil and oil products (13%); transport equipment and components (12%), and others miscellaneous (58%) (includes refined products, coffee, agriculture and materials such as iron ore).

Brazil’s main exports partners are: China (27%), the US (12%), Argentina (6%), the Netherlands (5%) and Chile (3%).

Brazil’s exports by sector

Source: Trading Economics + Own chart creation

Key summary points on the Brazilian economy

  • Brazil is quite linked to global GDP. If global growth is strong then there is strong demand for Brazil’s raw materials which underpin the economy.
  • Brazil’s exports are very well diversified with China as the main buyer.

IMF global GDP forecast for 2020 GDP is now -3%, rebounding to +5.8% in 2021

Source: Statista courtesy IMF

The coronavirus impact in Brazil

Worldometers reports that Brazil has 710,887 coronavirus cases and 37,312 deaths, as of June 9, 2020. The number of cases makes Brazil the second highest globally, after the USA. The chart below shows Brazil’s coronavirus daily new cases are perhaps stabilizing. We will see soon.

Source: Worldometers.info

Brazil government response

Brazil followed the world with lockdowns and the government has had support programs (emergency salaries etc) as you can read here. Re-openings have been attempted but in some cases have been thwarted by local judges, notably in Rio de Janeiro. Many feel it is too early to reopen.

Brazil’s President wants to reopen the Brazilian economy, but COVID-19 is still not yet contained

Source: Wall Street Journal (video)

The iShares MSCI Brazil ETF details

The iShares MSCI Brazil ETF seeks to track the investment results of an index composed of Brazilian equities, with exposure to large and mid-sized companies in Brazil. The management fee is 0.59%pa.

The top holding is Vale SA [BZ:VALE3] (VALE) which is the world’s largest iron ore producer and the world’s largest nickel producer. You can read more about Vale in my recent article on the iron ore miners here.

The Brazilian banks are reportedly in a solid position as you can read here. The April 2020 article states:

Large banks in Brazil may have several flaws. Their apps aren’t the best, credit and fees are arguably expensive, and service channels are time-consuming and oftentimes full of paperwork. But there is one thing nobody can deny – they are rock-solid.” This solidity is based on several factors. First, the financial system is mainly in the hands of five large, profitable banks. Financial system return on equity (ROE) totalled 16.5% in September 2019, when the average of the largest private banks was 21%; and the banks are well capitalized, with core capital around 14%…….The banking system is also liquid, with more than 90% of large banks’ funding sourced locally and denominated in local funding (mostly from deposits). Reserve requirements represent R$416 billion, or roughly 6% of GDP (as of January 2020), and the central bank has also reacted to the crisis caused by Covid-19 with R$2.7 trillion of liquidity and capital measures, which combined represent 36.6% of GDP (much higher than the amount pumped into the economy in 2008, which was then R$200 billion, or 5.9% of GDP).

Petrobras (PBR) is Brazil’s largest oil and gas producer, partially owned by the Brazilian government.

Top ten holdings

Source

Breakdown by sector of the Brazil fund

As shown below the top 3 sectors are financial (29.29%), materials (16.00%), and energy (12.19%). Consumer staples (11.19%), consumer discretionary (9.76%), industrials (7.32%), and utilities (6.31%) are also significant.

Source

Brazil’s house prices are the highest in Latin America. Brazil’s household debt to GDP is 30.4% which is much lower than many other countries.

Brazil house prices compared (USD psqm, based on capital city rates)

Source: Global Property Guide

Valuation

The current PE ratio is only 11.7, with a dividend yield of 4.49% for the iShares MSCI Brazil ETF.

Valuation looks appealing assuming the country can overcome COVID-19 and rebound reasonably quickly.

Aerial views of Rio de Janeiro, Brazil

Source & source

Risks

  • A prolonged global economic downturn would hurt Brazil’s exports and spill over into their economy. Brazil has some sensitivity to oil and iron ore prices.
  • Brazil is still struggling to contain the coronavirus. The economy may therefore remain closed for longer.
  • Sovereign and political risks – Brazil has moderate sovereign risk. Brazil is the 106 least corrupt nation out of 180 countries.
  • Currency risk. The stocks in the iShares Brazil fund are priced in BRL, and the fund is priced in USD. This means if the BRL was to fall further it would typically impact the fund negatively.
  • The fund can trade slightly above or below its net tangible assets [NTAs].
  • Market sentiment – Risks with COVID-19, US-China trade tensions, US riots.

Brazil has a young and vibrant culture with a median age of 33.5 yo

Rhythm Brazil and Paulini - Mardi Gras 2015 - Best Choreography ...

Source

Further reading

Conclusion

The Brazilian equity market and currency have been heavily sold down in 2020 as part of the COVID-19 sell offs. To date the Brazilian equity market has recovered about 50% of its 2020 falls but remains 33% lower YTD. This has resulted in the historical PE ratio for the fund dropping to a low 11.7, and levels just above the end of the GFC.

Brazil is still struggling to contain the coronavirus and mostly remains in lockdown. Brazil’s President Bolsonaro is keen to re-open the economy soon.

Risk remains with the coronavirus and the degree and length of global economic disruption ahead. Brazil is a significant global exporter of raw materials (notably iron ore and oil), so a global recovery will be important for Brazil to fully recover. A prolonged global recession will not help Brazil to recover.

I rate the iShares MSCI Brazil ETF as a buy for investors with a 3-5+ year time frame.

As usual all comments are welcome.

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Disclosure: I am/we are long VALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.





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