Latin American exchange-traded funds combined two of the hottest buzzwords of recent years: Emerging markets and low fees. But with a number of big Latin American economies struggling, there’s no such thing as a sure thing south of the border.
There are 22 exchange-traded funds that specialize in Latin America, according to the Web site ETF Database. But only one has a positive year-to-date return, the 7% gain on Global X Funds’ MSCI Argentina X fund (ARGT). The biggest, iShares’ Brazil Capped ETF (EWZ), with $4.9 billion in assets under management, is down more than 8%. And bringing up the rear is Direxion Daily Brazil Bull 3x Shares (BRZU), down nearly 37% through Nov. 20.
Reeling Heavyweight Brazil
The culprits range from recession, to falling oil prices, to a fundamental reappraisal of just how fast Brazil will continue to grow over the long term, reports from consulting firms Moody’s Analytics and IHS Global Insight say. Better bets in Latin America right now are Chile and Colombia. Prospects are probably worst for Venezuela, plagued by falling oil prices, rapidly-expanding competition for the nation’s heavy crude coming from northern Canada via the prospective Keystone XL pipeline, and the country’s perennial struggle with an ineffectual populist government.
Since most Latin American ETFs track a specific nation’s stock indices, how one feels about them relates directly to the risks and benefits of doing business in that country.
“The economic risk profile of Latin America has deteriorated during the past quarter,” IHS economist Rafael Amile said. “Economic risks have deteriorated in Brazil and Mexico and other nations have not improved.’’
IHS is preparing to review its long-term forecast for Brazil, which calls for average 3.7% economic growth. That’s already lower than the 5% clip it has sustained for decades, but will still prove too optimistic unless productivity gains speed up and governments implement unpopular structural reforms, he said. At the same time, Moody’s notes that while Brazil slipped into recession at midyear, inflation is running around 6.5%. Even as Brazil’s central bank raises interest rates, politicians are still implementing over-stimulative fiscal policy, Moody’s says. Investment bank Nomura has gone further, arguing the Brazil’s economy is in danger of “unraveling.’’ (For more, see: Top Brazilian Stocks for U.S. Investors.)
Seven of 22 Latin American ETFs track Brazilian stocks or bonds, the ETF Database says. But Brazil has the lowest growth of major Latin American nations as well as the highest inflation, and its currency has posted big losses against the dollar in the last year, according to BlackRock. (For more, see: Invest in Brazil with These ETFs.)
What's Good For One...
Lower oil prices are good news for Chile, which has one ETF tracking its stocks, but not for oil exporters Mexico (which has three ETFs), Ecuador (none), Colombia (three), and Venezuela (none), IHS says. Six ETFs invest in multiple Latin nations.
The leading Latin ETF player, by far, is BlackRock’s iShares unit, which runs the largest funds specializing in Brazil, Peru and Mexico, as well as the largest diversified fund, the iShares Standard & Poor’s Latin America 40 fund (ILF), which has lost 4% of its value so far this year. By comparison, the Standard & Poor’s 500 is up 11% for the year. Here are profiles of the five largest funds, according to ETF Database.
iShares MSCI Brazil Capped ETF (EWZ)
The largest Latin American ETF is a pure play on Brazil — a trendy bet the last few years, but much less so now. Its expense ratio of 0.61% is more than six times as high as that of a comparable ETF based on the S&P 500. Down 8% for the year, it has been hit by troubles at its largest holding, Itau Unibanco (ITUB), which is down about 20% since August. Oil companies Petrobras (PBR) and Vale S.A. (VALE) are down 30% and 43% for the year, and even beer titan Ambev S.A. (ABEV) is in the red. Including their preferred shares, these companies account for about a third of the ETF’s assets.
iShares MSCI Mexico Capped ETF (EWW)
The second-largest Latin ETF with $2.9 billion under management, this fund has dipped about 2.5% so far this year. Its expense ratio is 0.48% of assets. Unlike the commodity-focused EWZ, Mexico’s top ETF focuses on telecommunications. More than 17% of its assets are in Carlos Slim’s America Movil (AMX), a wireless-communications giant whose shares have erased an early-2014 loss and are now up about 1% for the year. Local Coca-Cola bottler FEMSA (FMX), the #2 holding, is down by less than 1%, but top-five holdings Grupo Televisa (TV) and construction giant CEMEX (CX) are both up in the low double-digits. Five-year returns have topped 17%, according to iShares. (For more, see: Want To Invest in Mexico? Start With This ETF.)
iShares Latin America 40 (ILF)
The largest Latin fund to be diversified across nations, the ILF has declined by 4% so far this year. Its expense ratio is an even 0.5%. It is designed to track S&P’s Latin America 40 Index, which covers equities in Brazil, Mexico, Argentina and Chile. Five-year returns are +11% through last December, according to iShares. Top-five holdings are America Movil, Ambev, Petrobras, and two Brazilian banks.
iShares MSCI Chile Fund (ECH)
This $370 million fund is down almost 11% despite the generally positive Chilean outlook. Its expense ratio is 0.61%. Its top five holdings, comprising about 40% of the ETF’s assets under management, include two utilities and LATAM Airlines Group (LFL). Its five-year return through 2013 was +10.8%, according to iShares.
iShares All Peru (EPU)
Another iShares fund, this one has lost about 1.3% of its value this year and has an expense ratio of 0.62%. However, returns since inception are nearly 9% annually, according to BlackRock. Top holding Credicorp Ltd. (BAP), the nation’s biggest bank, have been on the rise, and Southern Copper Corp. (SCCO) is up 16% for the year. (For more, see: The Best ETF for Investing in Peru.)
The Bottom Line
ETFs offer a cheap way to get exposure to Latin America's most exciting investment locales (as well as its laggards). Choose carefully, and consider the differences between funds that have a greater focus a specific industry or country and those that are more diversified because there’s no such thing as a sure thing south of the border. (For more, see: The Best 4 Places to Invest in Latin America.)