Investing in the EWZS ETF: The Complete Guide

What is EWZS?

The iShares MSCI Brazil Small-Cap ETF (ticker: EWZS) seeks to track an index composed of Brazilian small-cap equities. The fund offers a way to express a single-country focus targeting the bottom 15% of the Brazilian market capitalization, providing targeted exposure to smaller companies in Brazil.

The fund seeks to track the investment results of the MSCI Brazil Small Cap Index, which is designed to measure primarily the performance of equity securities of small-capitalization companies listed on stock exchanges both inside and outside of Brazil.

Founded in 2010, EWZS is the largest and longest-lasting passively managed index tracking Brazilian small-cap equities. “Small cap” generally refers to companies with a full market capitalization between $250 million and $1.5 billion USD.

Rather than using fixed, absolute dollar amounts, MSCI defines small caps by targeting the bottom portion of a country’s total equity market. The small-cap indices are designed to cover roughly 15% of the free float-adjusted market capitalization. The remaining 85% of the market is covered by the EWZ (see our What is EWZ Guide).

Characteristics

Methodology

The fund aims to track the performance of Brazilian equity companies listed both inside and outside of Brazil. Because of this, the fund is exposed to exchange rate variations—the most important being the BRL/USD (Brazilian Real to US Dollar) exchange rate.

The fund is built using a free float-adjusted market capitalization-weighted index. This means the components are weighted based on their market capitalization, but only counting the shares that are actually available for public trading (the “free float”).

Example: If a stock has a $10 billion market cap but only 10% of its shares are free float, the ETF considers only $1 billion for the index. Conversely, if a stock has a $2 billion market cap but a 90% free float, it will contribute $1.8 billion to the index.

This is standard practice among most major global indices (such as the S&P 500, MSCI World, and FTSE 100). They use this methodology rather than total market cap weighting because it guarantees accurate market representation. It prevents companies with massive overall valuations but very few publicly traded shares from disproportionately swinging the index. It is also crucial for tradability: index funds and ETFs must buy shares in the exact proportion of the index, and including illiquid shares could negatively impact the fund’s performance.

The definition of a “Small Cap” can vary by country or institution, but it is largely considered to be companies around $200 million to $2 billion USD. However, to ensure an easier and more consistent methodology, EWZS simply covers the bottom 15% of the total free float-adjusted market capitalization of the Brazilian equity universe. The remaining 85% is covered by EWZ (iShares MSCI Brazil ETF), which shares similar characteristics but focuses on large- and mid-cap stocks.

As a result of this methodology, the ETF typically holds a portfolio varying between 80 and 90 companies—a significantly larger number compared to the 40 to 50 large- and mid-cap stocks present in the EWZ.

Rebalancing and Concentration Limits

The ETF is rebalanced quarterly based on its “Parent Index”—the MSCI Brazil Index.

Both the ETF and the index have a strict market concentration policy that limits the weight of any single “group entity” (constituents that MSCI determines have a control relationship) to a maximum of 25% of the underlying index weight. Furthermore, the sum of all group entities with a weight above 5% cannot exceed an aggregate of 50% of the index weight.

To determine these “group entities,” MSCI analyzes the financial accounts of listed companies holding stakes of 20% or more in other listed companies to see if these stakes are controlling in nature.

Main Sectors and Top Holdings

EWZS is highly diversified across various sectors and holdings, with the largest single holding accounting for less than 6% of the fund. It offers excellent sector diversification, especially compared to the broader EWZ.

Because EWZS leans more heavily into consumer products and utilities, it serves as an excellent index for capturing Brazilian domestic consumer spending. In contrast, IBOV and EWZ rely much more heavily on financials and large export commodity companies.

Sector Breakdown

Top Holdings

The top 16 holdings in EWZS make up roughly 50% of the ETF, which is comprised of around 84 total stocks.

Historic Performance & Dividend Yield

EWZS has a policy of paying out dividends twice a year, typically in June and December. Historically:

See also: Why Are Brazilian Equities Dividend Yields So High?

What’s the Difference Between EWZS and SMLL (B3: SMLL11)?

The Small Cap Index (SMLL B3), managed by the B3 exchange, is the primary benchmark index for Brazilian small-cap stocks. While the IBOVESPA covers mid- and large-cap companies tied to the Brazilian economy, the SMLL covers companies with smaller capitalizations, normally varying between a few hundred million dollars to $1 billion.

The SMLL Index is calculated using a similar methodology to EWZS, focusing on the bottom 15% of market capitalization and excluding companies in Chapter 11 bankruptcy (or Recuperação Judicial in Brazil).

The biggest difference between the two indices is the geographic listing rule, meaning that the SMLL and its local ETF equivalent (SMLL11) do not include Brazilian companies listed outside of Brazil. This is very similar to the difference between IBOV and EWZ discussed in our What is EWZ Guide.

1. The Geographic Listing Rule

• SMLL: Only includes companies that are physically listed on the B3 exchange in Brazil.
• EWZS: Can include companies listed anywhere in the world (such as the NYSE or NASDAQ), provided they pass MSCI’s strict “economic proximity” rules. To qualify for EWZS while listed abroad, a company must satisfy core criteria regarding its “Nerve Center” (executive team and board must make decisions in Brazil) and its Revenue/Assets (the vast majority must be derived from the Brazilian domestic market).

2. The Rise of Offshore Listings

In recent years, an increasing number of high-profile Brazilian corporations have bypassed a local listing in favor of US exchanges to tap into deeper pools of global capital and capture higher tech valuations. Today, offshore-listed companies account for roughly 10% to 12% of the total market capitalization of all Brazilian equities.

Because of its rigid local-only rule, SMLL completely misses these companies, whereas EWZS embraces them. Notable examples of US-listed players included in EWZS’s universe are:

• Digital Banking & Finance: Inter Bank (INTR), PagSeguro (PAGS), Patria Investments (PAX), and Vinci Partners (VINP).
• Mining: Sigma Lithium (SGML).
• Health-Tech: Afya (AFYA).

3. Sector Exposure and Number of Stocks

The sector exposure of SMLL is very similar to EWZS, featuring a diversified sector mix focused on consumer products, materials, and utilities. The indices diverge slightly in the number of stocks, with SMLL tracking around 110 listed stocks while EWZS normally hovers around 80 to 90 stocks. Notably, almost 35 of the 110 stocks in SMLL represent less than 1% of the index each.

EWZS vs. EWZ

The EWZS (iShares MSCI Brazil Small-Cap ETF) and EWZ (iShares MSCI Brazil ETF) are the two passively managed US ETFs from iShares focused on Brazilian equities.

• Composition: Both ETFs share very similar methodologies, including Brazilian companies listed both inside and outside of Brazil under strict composition rules. The only difference is that EWZ focuses on the large and mid-caps that make up the top 85% of the market, while EWZS focuses on the small caps that make up the bottom 15%.
• Liquidity: In terms of liquidity, EWZS is the second most liquid Brazilian ETF behind EWZ. However, in direct comparison, it is much smaller, with an average daily trading volume of around $500,000 USD, compared to EWZ’s ~$30 million USD.
• Expenses & Fees: Both EWZ and EWZS have the same expense ratio of 0.59% per year.

See also: Investing in the EWZ ETF: The Complete Guide

How Can I Invest in EWZS?

Most investors globally can access the NASDAQ-listed EWZS, but some regions face specific regulatory hurdles because no direct European UCITS equivalent currently exists for this specific small-cap fund.

Historic Performance vs. Brazilian Real

Because the underlying companies generate most of their revenue in Brazilian Reais (BRL) but the ETF is priced in US Dollars (USD), the historical price performance of EWZS is heavily tied to the strength or weakness of the Brazilian Real. Currency depreciation can eat into equity gains when converted back to dollars.

Disclaimer: This guide is for informational purposes only and does not constitute financial advice. Always conduct your own research or consult with a licensed financial advisor before making investment decisions.

See also: Investing in the FLBR ETF: The Complete Guide

See also: Investing in the EWZ ETF: The Complete Guide