One of the major issues when it comes to international investing is that we tend to think about regions as cohesive entities-especially when it comes to emerging markets. We simply lump them together in a wide swath and access them via funds like the iShares MSCI Emerging Markets (NYSE:EEM). That’s all well and good from a cheap indexing perspective. However, Singapore is very different place than Poland.
That divide between countries is even more prevalent in Latin America.
Several nations in the region are holding back the potential superstars due to very “hands-on” governments. For investors, Latin America is prime example of when to go into individual funds rather than an all in one approach.
A Tale Of State-Controlled Enterprises
For those investing in Latin American, a broad fund like the iShares Latin America 40 (NYSE:ILF) may not be the best choice. The reason is that the region is a tale of different worlds.
The first, which include nations like Argentina, Venezuela and BRIC superstar Brazil- have continued to embrace state-controlled economic planning. Populist politics continues to rule and these nations have floundered in recent years as high inflation, taxes and tariffs have crippled economic growth. Price controls- on everything from gasoline to bananas- have prevented firms from properly reinvesting back into the nations. Even with those price controls, inflation in Venezuela is running at 50%.
Electric utilities refuse to upgrade Venezuela’s and Argentina’s aging grid, while extremely high taxes in Brazil have knocked down a variety of industries. Meanwhile, populist-fueled events such has the Argentinian government seizure of oil producer YPF S.A. (NYSE:YPF) have made the trio a hard place for foreigners to do business.
All in all, the trio of Argentina, Venezuela and Brazil are only set to grow their GDP’s at a combined 2.5% this year. Standout and key emerging market Brazil alone will only see 1.9% growth.
However, the other side of Latin America is vastly different. Nation’s like Chile, Peru and nearby Mexico have embraced free-market principals. That focus has served them well over the last few decades. The trio- along with Colombia- have improved their finances, welcomed foreign investment and have even formed their own free-trade agreement called the Pacific Alliance trade bloc.
That 2005 agreement removed 90% of tariffs on goods passing through the nations. Since then, inflation has dwindled and these nations have experienced tremendous export driven growth. The total exports by Pacific Alliance nations surged from just $115 billion in 2009 to $183 billion in 2012. That export growth is doing wonders for these nation’s GDPs as well. According to Morgan Stanley (NYSE:MS), the so-called Pacific Alliance is expected to grow their GDP’s by 4.25% this year.
Betting On The LatAm Winners
Given that half of Latin America is still drowning in the populist ideas that defined it decades ago, investors may want skip those broad funds -like SPDR S&P Emerging Latin America (NYSE:GML) -which are heavy in the “bad” countries. Luckily, the ETF boom has made it possible to focus on Latin Americas best and brightest on their own.
One of the best options could be the ignored Global X FTSE Andean 40 ETF (NYSE:AND). The ETF tracks 47 different firms located in the prime LatAm nations of Chile, Colombia and Peru. This includes holdings in giants like construction firm Empresas ICA (NYSE:ICA) and energy giant Ecopetrol SA (NYSE:EC). Export driven industries make up more than half of the ETFs holdings.
While single country ETFs do exist for the trio- such as the iShares MSCI Chile Capped (NYSE:ECH) and Market Vectors Colombia ETF (NASDAQ:COLX) –AND is the best way to capture all three in one ticker. And at just 0.72% in expenses, it’s pretty cheap too.
With the three of the Pacific Alliance included in AND, adding Mexico can be done with the iShares MSCI Mexico ETF (NYSE:EWW). The $2.5 billion fund is one of the largest emerging market ETFs trading and makes adding exporting giant Mexico a breeze.
EWW spreads those assets among 52 different firms. Several of which- like Coca-Cola FEMSA (NYSE:KOF) –have a presence in almost all Latin American nations. That makes EWW a great play on the several of the LatAm problem children as well. All for around 0.50% in expenses. Pairing it, with AND gives investors the best way to play the Latin American divide.
The Bottom Line
While investors tend to lump all of Latin America together into one cohesive unit, the truth is there is a pretty big divide among the nations. Several continue to embrace old populist ideals and that’s hurting their economic futures. For investors, betting on Latin America’s rising free-market superstars could be the best way to play the region in a portfolio. The previous picks- along with the iShares MSCI All Peru Capped (NYSE:EPU) –make ideal selections.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.