The Global Outlook of ETFs

Risk and performance analysis of the main country ETFs

In recent years, we have seen a significant growth in popularity of ETFs (or "Exchange Traded Funds") globally. Brazil is in the initial phase of this development, with fewer ETFs compared to more mature markets, such as the US market, where Economatica registers more than 1,900 ETFs available in its database.

ETFs are extremely versatile investment instruments that provide diversification, accessibility and the ability to carry out complex operations in order to optimize market access and, consequently, increase the chances of obtaining attractive returns. Among its most relevant features, we highlight the flexibility of trading in the secondary market, an advantage that traditional funds generally do not offer. In addition, ETFs allow investors to access a wide variety of assets, themes, and portfolios.

In this research piece, Economatica decided to focus on a comparative analysis of ETFs associated with different countries that are listed in the US. The sample includes about 48 ETFs, all providing access to markets in different nations.

Starting with Brazil, it is represented by the ETF known as EWZ, or iShares MSCI Brazil. It is a listed fund whose objective is to replicate the investment results of an index made up of shares of large and medium-sized Brazilian companies. When comparing the EWZ to other ETFs in Latin America, it is by far the most traded, with average daily trading volume (ADTV) exceeding $770 million over the past 12 months.

In a comparative analysis with other ETFs representing Latin American countries, the EWZ ranks third in performance, accumulating a gain of 17.31% in 2023. With the recent rise in the Brazilian stock index, the ETF that reflects the Brazilian market presented the best performance of the last quarter, accumulating a valuation of more than 21.12% in the period.

Just to the south of Brazil, we find Argentina comes in first place in the ranking, with an impressive return of 33.42% in 2023 and a cumulative valuation of more than 81.94% in one year. This strong performance may reflect the economic situation in Argentina, which is currently facing high inflation, which can lead to an increase in demand for assets that offer protection against it.

Analyzing the global sample of assets, that is, considering the 48 thematic ETFs included in our analysis, the EWZ ranks ninth in annual performance.

In the top five group, the Global X Nigeria Index is the leader with an impressive return of 53.05% YTD, closely followed by the Global X FTSE Greece 20, which also posted a robust return of 41.09%. In third place is Global X MSCI Argentina with a return of 33.42%, closely followed by iShares MSCI Mexico Investable Market Index and iShares MSCI Poland with 27.55% and 23.29%, respectively.

On the other hand, in the bottom five group, we have iShares MSCI Turkey at the bottom of the list with a return of -16.28%. The iShares MSCI Thailand and iShares MSCI Malaysia Index are also underperforming, with returns of -11.30% and -11.20% respectively. Completing the list, we have the iShares MSCI Hong Kong Index and the Vaneck Egypt Index.

It is worth noting a geographic connection that is revealed when exploring the performance of ETFs. While emerging countries such as Nigeria, Greece and Argentina had a robust performance, some more developed economies had negative performances.

Return is undoubtedly one of the most important elements in asset valuation. However, there are several other metrics that play a key role in risk and return analysis, such as volatility and drawdown.

?Volatility represents the rate at which the price of an asset, in this case an ETF, increases or decreases for a set of returns. ETFs with high volatility are considered more risky, since the price of the asset can change radically in a short period, in either direction. The EWZ, which tracks the Brazilian stock index, stands out in both performance and volatility, displaying 40% volatility over the 5-year period. Consequently, it is at the top of the list of most volatile ETFs in this sample, just like Turkey, which also has a volatility of 40%. The two are followed by Argentina and South Africa, which also show considerable volatilities, hitting 35% in the same period.

The drawdown is also an important risk measure to consider. Shows the maximum percentage loss that an investment has experienced during a specified period. In this case, we are looking at drawdowns over a one year period. The iShares MSCI Poland tops the list with a maximum drawdown of -28.10%. This means that at some point in the last year, this ETF has been down 28.10% from its previous high. It is closely followed by Hong Kong (EWH) and South Korea (EWY) ETFs, with significant drawdowns. In the 13th position is the Brazilian stock market ETF, represented by EWZ, with a drawdown of -20%. So even with its remarkable performance, EWZ also saw a substantial drop at some point during the year.

Lastly, it is essential to highlight the importance of ETFs as diversification instruments, thematic strategies and access to new geographies and markets. They offer investors an effective and efficient way to provide access to a wide range of assets, reducing the risk of concentrating too much on a single investment. With the largest database in Latin America, Economatica is ready to help you create in-depth analyzes for that market, offering investors and analysts valuable information that can contribute to making more informed decisions.

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