We analyze the 3 Most Important Stock Market Indexes in Brazil. The South American country is a leading emerging market and a commodities superpower.
With a population of more than 200 million, Brazil is one of the most prominent emerging economies on the planet. Since the year 2000, it has experienced tremendous economic growth
In fact, Brazil is part of the BRICS countries, a group 5 of the largest emerging economies that are likely to play a key role in the future of the world.
Hence, the South American country is interesting to many investors, especially those focused on the long-term growth of their portfolio. And that is important, because the stock market in Brazil is highly volatile.
Next, we will analyze the most important stock indices in Brazil. This will allow us to look for an ETF to invest in the country if we want to do it passively. Or, conversely, to know at which level the Brazilian market trades relative to historical levels.
The IBOVESPA, also known as the Bovespa index, is the most famous stock index in Brazil. Bovespa stands for, in Portuguese, Stock Exchange of the State of Sao Paulo, where the main stock market of the South American country is located.
The IBOVESPA index is made up of the largest and most liquid listed companies in Brazil. The exact number of stocks within the index varies over time, depending on how many meet the eligibility criteria, but tends to hover around 70.
Within the index, companies are weighted according to their market capitalization adjusted for free float.
The index is calculated and published by Bolsa do Brasil, the company that operates the country’s stock exchanges.
Something we should know about the Ibovespa is that, like the German stock index DAX, it is a total return index.
This means that, when we look at a historical chart of the index, dividends paid out by companies over the years are included in that performance. This is not the case for most stock indices, whose price is adjusted down when one of their companies pays a dividend to reflect the lower stock price after the dividend has been paid to shareholders.
Although Brazil is an emerging country, this stock index was introduced in 1968, so it is more than half a century old.
Because Brazil has suffered some periods of very high inflation over the last few decades, the value of the index has been adjusted downwards a few times.
Otherwise, its value would be too high to be used comfortably. In fact, the same has been done with the country’s currency, the Brazilian Reais, which has “lost” a few zeros in the past after periods of very elevated inflation.
The official value of the Ibovespa index is published in Brazilian Reais (BRL), although you can also find versions of the index in US Dollars, Euros and other foreign currencies.
If you want to find additional information about the IBOVESPA, here is the link to its official website.
Another interesting stock market index if we want to invest in Brazil through an ETF is the MSCI Brazil, published by the US company MSCI.
The MSCI Brazil includes all Brazilian companies that are also part of the MSCI Emerging Markets World Index, an index made up of the most important companies in the emerging countries.
The exact number of stocks within the index fluctuates over time but is typically somewhere between 50 and 60. As a result, the MSCI Brazil has a very high correlation with the Ibovespa, as both indices are dominated by the same companies.
In the MSCI Brazil index companies also are weighted by their market capitalization adjusted for free float, so the largest ones set the tone for the entire index.
An important characteristic to mention is that the MSCI Brazil does not include dividends and uses the US Dollar as the main currency, unlike the Ibovespa. This makes its historical price chart seem less spectacular.
But as investors we would be investing in very similar indices. If we want to compare the two indices, we will just need to make sure that we select versions of the index that are comparable. This means denominated in the same currency, and either of total return or of price return.
You will find more information about the MSCI Brazil on the website of MSCI.
FTSE Brazil Capped
Finally, the company FTSE Russell, a subsidiary of the London Stock Exchange and a main published of stock market indices, also calculates the FTSE Brazil Capped index.
It is composed of approximately 100 of Brazil’s largest company by market capitalization. The exact number of stocks within the index varies over time.
The FTSE Brazil Capped index gives us greater exposure to smaller capitalization companies, compared to either the Ibovespa or MSCI Brazil, as these have fewer stocks in the index.
Another important feature of the FTSE Brazil Capped is that it imposes certain caps on the weights of companies that are part of the index.
In particular, the methodology of the index does not allow any company to have a weight higher than 20% of the total value of the index, and the aggregate weight of all companies with an individual weight greater than 4.5% cannot exceed 48%.
If a company or group of companies were to have larger weights than contemplated in the index methodology, those weights would be capped, and the difference assigned to the rest of the stocks.
Such caps are put in place to prevent the index from being excessively concentrated in a particular company, or small group of companies.
If you want to find more details about this index, you can click on the link to the FTSE Russell website.
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