The MSCI Brazil iShares (EWZ) is an exchange-traded fund that represents ownership in the Morgan Stanley Capital International (MSCI) index of Brazilian equities. Each of the companies in the top ten holdings trade in the United States, although not all share classes are available for trading on one of the major U.S. exchanges.

As is the case with many non-U.S. ETFs, the largest companies represent an extremely large proportion of the fund's overall capitalization. In the case of EWZ, the top ten holdings comprise nearly 2/3 of the value of the fund, led by two share classes of Pretroleo Brasileiro SA (commonly known as Petro Bras), the giant Brazilian energy company. In fact, the fund's 23.77% weighting in the energy sector is all accounted for by Petro Bras.

The next largest industry represented is Basic Materials, which represents more than 29% of EWZ. The largest stocks in this category include Companhia Vale do Rio Doce (RIO), which has two share classes represented in the fund and accounts for more than 16% of EWZ's value.

Brazil isn't all old-style manufacturing, materials and energy. Telecom offers a rather large 12.3% slice of the EWZ pie and Banks account for another 11.7%. Overall, however, the Brazilian stock market is far more manufacturing-oriented than the U.S. equity market, making it very cyclical in nature.

Although Brazil remains one of the safer plays in Latin America--its deep and liquid financial markets show less risk than other countries, many of which sport extremely heavy debt loads--the nation's stock market is still subject to periodic jitters, especially when other South American countries run afoul of their creditors.

The value of the Brazilian currency, the Real (pronounced ray-AL), after strengthening from about four per dollar in late 2002 to near 2.6 per dollar in mid-2003, now trades near 3.1 per dollar, a more than -20% depreciation in the past eight months. The currency traded as low as 1.6 during 2000. Remember, a weaker Real (strong U.S. dollar), all things being equal, will lower the dollar-translated returns for investors in EWZ.

If you hold a portfolio of primarily U.S. equities, then EWZ could provide you with an excellent dose of much-needed diversification. Unlike shares in the largest European countries, the correlation between the U.S. stock market and Brazil's market is relatively low--near 40%. However, the fund is far more volatile than the U.S. stock market, with an average daily trading range above 3% (the S&P 500 is near 2%). During a bull market, EWZ is likely to outperform the S&P 500. However, during a bear market the fund is likely to fall relative to the major U.S. indices.

HOW TO MAKE MONEY IN EWZ THIS YEAR
EWZ has fallen in three waves thus far from its early 2004 high (based on Elliott Wave Theory, which I use heavily in my analysis). A move above $15.00 would imply that substantial further gains are due (assuming it does not first fall below $12.13). I expect a drop below $12.13 first, with my main target near $11.75. After that, a decent rally is possible, which could take the fund back to $15.25. From there, my forecast calls for a much sharper drop, perhaps to sub-$10.00 levels.

What does this mean for investors and traders? Well, long-term investors may want to short the fund at current levels, as they should be able to make 10-15% fairly quickly. The Brazilian real (currency) has rallied recently, but probably does not have a whole lot more room to rally. That said, if you are short, place stops above $15.00 as a move past there would imply that the fund could make a run for its high ($18.80) instead.

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