One of the most popular countries for investors over the last decade is quietly building momentum and is joining its Latin American peers. Brazil, the cornerstone of the BRIC investment strategy, recently hit a fresh three-month high on the back of a global recovery and attractive valuations.
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Brazil is the economic king of Latin America, and offers the largest number of investment opportunities for investors, however there are other countries that cannot be overlooked. Brazil's GDP rose by 9% year-over-year, its best number in several years. Peru's GDP grew by 8.8% during the first quarter, its best reading since 2008. Chile was not as impressive, with growth coming in at 1% for the quarter. The small country of Columbia showed 4.4% growth, as Mexico came in at 4.3% for the latest quarter.
The GDP numbers are definitely solid, but the real eye-opening numbers come from the performance of the related stock indices, without the exception of Mexico. The ETFs that track Colombia, Chile and Peru are all at or near yearly highs as most emerging and developed countries around the globe remain in trading ranges and well off their highs.
ETFs Overly Concentrated
Typically, an ETF would be the best vehicle for investing in a specific geographical region as it offers instant diversification. That is not necessarily the case for Latin America, unless you are interested in country-specific ETFs such as the iShares MSCI Chile Index ETF (NYSE:ECH) that invests strictly in Chile-based companies.
The SPDR S&P Emerging Latin America ETF (NYSE:GML) invests two-thirds of its assets in Brazil, followed by Mexico at 18%, Chile 11% and Peru 4%. In short, GML is a Brazil ETF with little exposure to Chile and Peru, two of the countries in which we want to invest. The Market Vectors Latin America Small-Cap ETF (NYSE:LATM) is not as heavily weighted in Brazil (43%), but again little exposure to the "other three" with Mexico and Chile at 23% and 10% respectively and no exposure to Columbia or Peru.
Picking Latin American Stocks
If the Chile ETF is not your cup of tea and the goal is to invest in an individual company, investors should consider Lan Airlines (NYSE:LFL). The Chile-based airline, which is a leader in the region, recently reported a net profit increase of 115% for the timeframe of January through June. This has the stock at an all-time high and ripe for a pullback that will result in a buying opportunity.
The Peru ETF (NYSE:EPU) is sitting just below a major breakout level and could be gearing up for a big run in the second half of 2010. Stock pickers should consider Creditcorp (NYSE:BAP), a bank based in Lima, Peru and that has operations internationally. With GDP growth of 8.8%, investors want to be positioned in the banks that can help fuel future expansion.
For Columbia there is the Global X Columbia ETF (NYSE:GXG) that is composed of stocks that mainly trade in Columbia and not the U.S. But there is Bancolombia (NYSE:CIB), which offers banking and financial services to customers in Columbia as well as surrounding countries in the region as well as the U.S.
The Bottom Line
In the end, it comes down to how an investor wants to gain exposure to Latin America. Investing in one of the Latin American ETFs with the majority of assets in Brazil may be the best option for some. But the diversification of the neighboring countries either through ETFs or individual stocks may be a better option. (Investing overseas begins with a determination of the risk of the country's investment climate. To learn more, see Evaluating Country Risk For International Investing.)
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