Brazil is one of the largest emerging economies, and one of the world’s biggest producers and exporters of commodities, but it has been failing to deliver the outsized growth investors have come to expect from developing nations—a reality that’s clear in the performance of the iShares MSCI Brazil Capped Index Fund (EWZ).

EWZ, the broadest U.S.-listed Brazilian equities ETF, with $7 billion in total assets, has now slipped 2.3 percent in the past week alone, putting losses at 10 percent in the past month. Shares of the ETF—now just under $50—are flirting with a one-year low of $49.07 a share—levels it hasn’t dipped to much in four years.

Investors are taking notice, and have already yanked from EWZ more than $2.5 billion from the fund since the beginning of the year. The ETF’s performance comes at a time when an investment in U.S. equities through, say, the SPDR S'P 500 ETF (SPY) has returned about 16 percent so far in 2013.

And for now, the outlook seems more dim than bright. Brazil has several problems brewing, including sluggish growth, rising borrowing costs, relatively high inflation, growing government debt and a consumer base that seems reluctant to boost consumption despite government efforts.

“Brazil is quite an amazing turn of events,” Hahn Investments’ Tyler Mordy told IndexUniverse. “It was once a country darling and now nobody will dare to call a bottom.”

In fact, the Brazilian government recently reported first-quarter GDP growth of 1.9 percent year-on-year, failing to meet the already-modest market expectations for growth to reach 2.5 percent—and projected 2013 growth would be just shy of 3 percent. By comparison, the U.S. first quarter GDP expanded 2.4 percent year-on-year.

The most recent blow to the Brazilian economy came last Thursday from Standard ' Poor’s, which lowered its outlook on Brazil’s sovereign debt. The ratings agency said that the increasingly negative outlook tied to slow economic growth and expansionary fiscal policy would likely lead to a downgrade of Brazil in the next decade, according to a report on the Financial Times.

“Fundamentals in Brazil put it squarely in the bottom 25 percent of our country model,” David Garff, managing director of Accuvest Global Advisors, told IndexUniverse recently, noting that momentum in that market in local currency terms is also negative. “The trailing 12-month price momentum in Brazil is down 3.5 percent.”

Accuvest, a Walnut Creek, Calif.-based registered investment advisor, uses the model to build its equity asset allocation portfolios using single-country ETFs designed to guide country-specific exposure. It looks at four factors:fundamentals, momentum, risk and valuation.

Brazil’s risk and valuations—it’s still cheap relative to peers—are positive, “but the degree to which fundamentals and momentum are negative drags Brazil down to 24 th out of 28 countries,” Garff said.

The local equities market—as measured by the broad Sao Paulo Bovespa index—is reflecting the negative outlook. It’s down more than 13 percent year-to-date in what amounts to the worst performance among major Latin American markets so far in 2013.

Garff’s firm is actually short Brazilian equities, and before he changes that, he’d need to see fundamental improvement as reflected by leading indicators such as acceleration, earnings growth, sales growth, return on equity.

“It’s important to keep the big picture in perspective,” Mordy said. “Most emerging markets are simply going through a cyclical adjustment, while developed markets are undergoing structural adjustments.

“Brazil is no different than most other emerging markets,” he added, noting that the downturn the country has seen has been exacerbated by a global downtrend in commodities—Brazil’s bread and butter.

Other Brazil-focused ETFs caught in the downdraft include a pair of small-cap focused strategies—the $52 million iShares MSCI Brazil Small Cap Index Fund (EWZS) and the $355 million Market Vectors Brazil Small-Cap ETF (BRF), which have year-to-date declines of 13.2 and 16 percent, respectively.

In the longer term, however, Mordy argues that prospects are good, as Brazil—like other emerging markets—continues to further integrate itself into global supply chains, while its population sees rising income and standard of living.

“These shifts take time,” Mordy said. “We are only in the foothills of a long journey.”

“Emerging [markets] is getting cheap,” he added. “Just like ‘value stocks,’ many of these countries now have a huge margin of safety. We are fairly close to a great buying opportunity.”

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