How to invest in Bovespa Index

Situated in South America, Brazil presents an attractive investment opportunity with its status as the biggest consumer market and the largest GDP on the continent. According to the International Trade Administration, it holds the second-largest economy and population in the Western Hemisphere. 

The country's economic appeal is further bolstered by its abundant natural resources and its reputation as a leading exporter of commodities like soybeans, coffee, beef, iron ore, raw cane sugar and oil, among others. In addition, Brazil has been steadily gaining prominence in the manufacturing sector, attracting investments in automobile production, aircraft manufacturing, and consumer goods. The mining and services industries also contribute significantly to Brazil's domestic economy, making it a well-rounded investment destination.

Looking to diversify your investment portfolio by including Brazil? Why not leverage its main index, the Bovespa index, or “Ibovespa”, as a means to gain exposure to a wide range of Brazilian companies? 

Let’s focus on how to invest in the Ibovespa index in this article, so then you can decide whether or not using the country's primary index can help you tap into the collective performance of key players in the Brazilian market.

What is the Bovespa index?

The Bovespa Index, or Ibovespa, is a total return index that includes a selected group of around 90 of the most actively traded stocks listed on the B3 (Brazil, Bolsa, Balcão) stock exchange in São Paulo, which is the primary stock exchange in Brazil, the second largest in the Americas, and the leading one in Latin America. As of May 2023, the B3 exchange has a market capitalization of more $825 billion and 357 listed companies, according to the World Federation of Exchanges.

Bovespa Index: components and characteristics

Since its creation in 1968, the represents a broad cross-section of companies from various sectors of the Brazilian economy and now acts as a key indicator of the health of the country’s economy. Today, it accounts for the majority of trading and market capitalization in the Brazilian stock market.

Given that Brazil holds the position of being the largest economy in Latin America, the Ibovespa index can be considered a reliable indicator of the overall economic well-being of the entire Latin American region.

You can trade the Brazilian index from Monday to Friday from 10:00 am to 4:55 pm Brasilia Standard Time (GMT-03:00).

As of the end of June 2023, the composition of the Index includes 87 stocks, with the top 10 components being the following:

1. VALE (VALE3) - Basic Materials (12,951%)
2. PETROBRAS (PETR3 and PETR4) - Energy (11,867%)
3. ITAU UNIBANCO (ITUB4) - Financials (6,681%)
4. BANCO BRADESCO (BBDC3 and BBDC4) - Financials (5,146%) 
5. ELETROBRAS (ELET3 and ELET6) - Utilities (4,419%)
6. B3 (B3SA3) - Financials (3,915%)
7. BANCO DO BRASIL (BBAS3) - Financials (3,531%)
8. AMBEV S/A (ABEV3) - Consumer Non-Cyclicals (3,270%​​)
9. LOCALIZA (RENT3) - Industrials (2,538%)
10. ITAUSA (ITSA4) - Financials (2,354%)

Historic prices of the Bovespa index

Weekly Chart of the Ibovespa Index (BRA50) from TradingView which powers the ActivTrader trading platform

Why should you trade the Bovespa index?

• Exposure to the Brazilian market - Index trading is a convenient and efficient way to participate in Brazil's dynamic business landscape, allowing you to potentially capitalize on the opportunities presented by various industries and sectors within the country (great for diversification).

• Diversification through a single position - It is also a great way to be exposed to one of the largest and most performant economies in Latin America through a single financial product.

• Accessibility and liquidity - Adding the Bovespa index to your portfolio means that you can trade a product that is easily available through different trading platforms and brokers, which means that it is easily accessible and liquid.

• Trading strategies - You can also employ various trading strategies, including hedging, speculation, and arbitrage for instance, which means that the Ibovespa index can be used by different types of traders.

What factors influence the Bovespa index the most?

• Local economy - It is also important to take into account the domestic economic landscape, as the state of the local economy influences investor confidence and sentiment.
• A robust and growing economy with favorable economic conditions can attract domestic and foreign investors, leading to increased buying activity and positive momentum in the Bovespa Index. Conversely, economic uncertainties or challenges may erode investor confidence, resulting in cautious or risk-averse behavior that can negatively impact the index.
• Political stability in the country - Political events, such as elections or political outrages for instance, can influence market sentiment, risk perception and volatility related to potential policy shifts, due to changes in political dynamics.
• Political instability impedes economic reforms, discourages investments, and hampers growth. Unstable governments are less inclined to enact policies that foster economic development and attract domestic and foreign investments. This absence of positive reforms and investments can hinder economic activity, adversely affecting companies in the Bovespa Index and potentially leading to a downward trend.
• Commodity prices - Because the country heavily relies on agriculture and agribusiness, as well as energy, oil, mining and other natural resources, changes in commodity prices mean that the country can get more (or less) money from its sales and exports of commodities to other parts of the world.
• Therefore, fluctuations in commodity prices affect the revenue and profitability of commodity-related companies, which affects the value of the Ibovespa index.
• Brazilian Real exchange - The official currency of Brazil is the Brazilian Real (BRL). The Brazilian economy is mostly based on its exports and its most important commercial partners of the country are China and the United States, which means that the US Dollar (USD) plays an important role in the country’s economy.
• Therefore, any significant currency fluctuation against the USD can influence the competitiveness of Brazilian exports and impact the earnings of multinational companies, and foreign investor sentiment towards Brazilian equities.
• Monetary policy - Banco Central do Brazil is the Central Bank of Brazil responsible for setting monetary policy trajectories and maintaining financial stability in the country.
• It is also one of the factors with the most significant impact on the financial markets, as any decision (QE, rising/falling interest rates, higher/lower bank deposits requirements, etc.) will affect the relationship between the demand and the offer of Brazilian Real in the economy, which will impact the markets.
• Market speculation - Market speculation and the overall trend can have an impact on the performance of the Bovespa index because it reflects the sentiment and expectations of investors regarding the future direction of the index.

An overall positive sentiment can drive buying activity, leading to a potential upward trend. Conversely, an overall negative sentiment can result in selling pressure and a downward trend in the index.

How to trade the Bovespa index

The first step to trading the Ibovespa index is to decide which trading instrument to use - meaning picking the one that best suits your trading strategy, your risk tolerance, as well as your time horizon. 

You can trade the Bovespa Index through different financial products such as Exchange-Traded Funds (ETFs), futures contracts, options, or Contracts for Difference (CFDs).

With ActivTrades, you can use CFD on BRA50 to get short-term exposure to the Brazilian index. Because CFD rely on margin and leverage trading, they are mostly used by active and aggressive traders through intra-day trading strategies (scalping or day trading). 

But it is also possible to use CFD with a swing trading approach that aims at capturing large bullish or bearish price movements over a few days or weeks.

To decide when to enter or exit the market, traders will mostly use technical analysis, which is a way to analyze historical price data action and technical indicators to determine the current trend and where prices might go next. This technique helps them to determine the optimum price levels.

In addition to chart analysis, some traders will also use fundamental analysis to determine whether or not the fundamentals of the country are strong enough to support growth and profitable investment opportunities.

Other ways to invest in Brazil

Apart from trading the Bovespa Index, there are other ways to invest in Brazil, such as investing directly in individual Brazilian companies listed on the Bovespa or other stock exchanges, or using an ETF, other indices from the Brazilian stock exchange, sectorial indices or related funds to get diversified exposure to the Brazilian market. You can also invest in Brazilian government bonds or corporate bonds issued by Brazilian companies, bet on the Brazilian real estate market, or invest in private companies or startups in the country.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.