The best income/dividend ETF for 2011

Are you looking for income? BZF may be the best deal in town, not only for income, but also for diversification. BZF is an ETF that tracks the Brazilian currency, however, it not only tracks the exchange rate, but also seeks to get paid the money market rates that are paid in Brazil and those rates are very high. The reason why this is so good, is that money market rates in Brazil are around or over 10%, and may even get better as the country is trying to reign on inflation. Note that what we are discussing here, for income, is not the exchange rates between the USD and the Real.

Please consider the significant difference between performance of the exchange rates and BZF:

While the US dollar lost 4.70% last year (or the Real gained 4.70%) versus the Real, BZF actually gained nearly 11%.

There are the average monthly exchange rates (Real/USD) for 2010:

These are the BZF charts:

Note that the actual closing price for BZF that you see in some systems does not include its distributions (including Google Finance), but you can get it through Yahoo. The distributions are quite significant and those unadjusted charts are wrong or misleading. BZF distributed $3.24 on December 22 2010 (roughly an 11% distribution).

If BZF is supposed to track the exchange rate, why such discrepancy? The answer is exactly money market rates. The deal gets better: Brazil is expected to raise rates as inflation is rearing its ugly head. Economists agree that those rates will rise even more in 2011.

Risks or Advantages?

The risk are another global meltdown and a run for the U.S. dollar, or a collapse of the Brazilian economy. While both are possible in theory, both are very unlikely.

In fact, it could be argued that an investor should diversify from the USD into Brazilian holdings, as the country is in the midst of a huge boom (witnessed personally), and there is always the possibility of the USD slipping back into recession.

Another risk is a tax on foreign investments to contain the Real appreciation. This will likely happen. The government today announced that the floor for the Real will be lowered to 1.60/1.65 (0.625). That is a high as they will tolerate.Any such move will have temporary effects. What we are going after here is not a further USD depreciation. It's the money market rates. If the USD drops even more, even better.

Currently, the government is discussing other new measures such as an increase on the IOF tax for foreigners or even a "quarentine" of inflows. Once these measures are announced there may be a one-time hit and that would be a great entry point, perhaps the best ever.

Currently BZF trades at $26.18.



Please do your own due diligence. This is not advice.