Brazil ETF EWZ Falls 20% In A Day After Lula Wins A Fourth Term

Before Brazil’s presidential runoff, Citigroup Inc. (C) asked 73 fund managers what a win by Luiz Inácio Lula da Silva would do to the market. Eight in 10 expected a fall of more than 5%.

On Monday, after Lula won a fourth term, the iShares MSCI Brazil ETF (NYSE:EWZ), the largest US-listed Brazil ETF, fell 20%. It was the fund’s worst day since the pandemic crash of March 2020.

A Bet On Change

The bet started with the first round on 4 October. Senator Flávio Bolsonaro took 47% of the vote to Lula’s 45%, a better result than polls had predicted.

Investors read it as a likely change of government and a tighter budget. That would let Brazil’s central bank cut interest rates faster. The next day, EWZ jumped 12.5%, led by the banks.

By the Friday before the runoff, EWZ had returned 35% this year, nearly three times the S&P 500’s gain. Then Lula won with 51.8% of the vote.

Two Hits In One Day

EWZ holds Brazilian companies but trades in dollars, so the result hit it twice.

In São Paulo, the Ibovespa index fell 13.9%. A 10% drop in the morning set off the first trading halt since March 2020. The real lost about 8% against the dollar, its biggest one-day drop since at least 2020.

In dollars, the two losses stacked up to EWZ’s 20% fall.

Banks First, Exporters Last

The selling sorted EWZ’s companies by one question: do they live off the Brazilian economy, or get paid in dollars?

Banks and other financial companies make up a third of the fund. They have lost about a quarter of their dollar value since the Friday before the vote. Utilities fell nearly as far. Lenders depend on domestic credit and on interest rates, so a weaker budget outlook lands on them first.

At the other end, WEG SA (WEGZY), Embraer SA (EMBJ) and Suzano SA (SUZ) rose in dollars. They sell much of what they make abroad, so a cheaper real lifts their earnings counted in reais.

Cheaper, On One Condition

The fall left EWZ cheaper. Its trailing P/E dropped from 10.8x before the runoff to 9.3x. That is its lowest since April 2025 and below its median of 10.9x since 2017.

The P/E fell 14%, against the fund’s 20%. It compares share prices and earnings both in reais, so it tracks Brazilian share prices and leaves out the real’s slide.

Whether that discount holds depends on the budget. Brazil’s gross public debt is above 82% of GDP. In January, the Treasury projected 83.6% for this year.

Interest rates are already high. The central bank’s Selic rate stands at 13.75%, even after five cuts in a row.

“Investors need a revised fiscal framework that generates primary surpluses sufficient to stabilise debt,” Viktor Szabó of Aberdeen Investments, part of Aberdeen Group plc (LON: ABDN), said.

The first signal comes before any budget: Lula’s choice of finance minister, where investors will look next.

In 2022, Brazil’s market cheered a Bolsonaro first round and lost the runoff. This October, it made the same bet and paid more for it.

Disclosure: Data as of 28 October 2026. This is not investment advice or a recommendation to buy or sell any security. ETF Copilot receives no compensation from the issuers of the funds mentioned. Managers of ETF Copilot may or may not hold positions in the funds mentioned.

First published in the ETF Copilot newsletter.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.