Latin America ETFs Bounce as Growth Slowdown Fears Ease

Economic data and China's willingness to limit yuan losses drive gains

Latin American markets, like their global counterparts, embraced encouraging economic data released Thursday from the United States and China coupled with news that Bejing may take steps to limit losses in its currency – the yuan. Most markets across the region advanced between 0.1% and 2%, with Brazil and Mexico on track for their third consecutive day of gains.

Data showing a decline in Americans filing for unemployment benefits and that China's trade grew at a faster pace than expected in July helped quell fears that the drawn-out U.S.-China trade war would send the global economy into a recession. Meanwhile, to stem further losses in the yuan, the People's Bank of China set the daily currency fixing stronger than what analysts expected and announced the planned sale of yuan-denominated bonds in Hong Kong.

"China wants the currency to have two-way flexibility, but it doesn't want the market to be too panicked," Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, told Bloomberg.

From a technical standpoint, Latin American exchange-traded funds (ETFs) added to gains from crucial support levels Thursday, which may trigger further buying in the short to mid-term. Below, we review the metrics of each fund and work through several trading possibilities.

iShares Latin America 40 ETF (ILF)

Launched in 2001 and charging a competitive 0.48% management fee, the iShares Latin America 40 ETF (ILF) aims to provide investments results that correspond to the S&P Latin America 40 Index. The benchmark comprises 40 large-cap Latin American companies. Brazil, Mexico, and Chile account for the fund's top country allocations at 63.95%, 21.14%, and 8.44%, respectively. More than 1.3 million shares change hands daily, which provides ample liquidity. A razor-thin 0.03% spread also allows traders to target intraday price fluctuations while minimizing trading costs. ILF has assets under management (AUM) of $1.64 billion, issues a 2.81% dividend yield, and is up 3.68% on the year as of Aug. 9, 2019.

ILF shares have traded roughly within a $5 range since the start of the year. The most recent retracement found crucial support from a trendline connecting three significant swing lows. Also, the relative strength index (RSI) gives a reading below 50, allowing for plenty of upside before a corrective move. Those who buy the dip should anticipate a retest of the trading range's top trendline at the $35 level. Consider placing a stop-loss order either below yesterday's low or at the midway point of the Aug.7 reversal candle.

Chart depicting the share price of iShares Latin America 40 ETF (ILF)

Global X MSCI Colombia ETF (GXG)

The Global X MSCI Colombia ETF (GXG) seeks to track the performance of the MSCI All Colombia Select 25/50 Index. To achieve its objective, the fund invests at least 80% of its $74.41 million asset base in stocks that make up the underlying index, including American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). The fund, which yields a healthy 4.20%, takes a sizeable bet on financials, allocating almost half of its portfolio to the sector. Key stocks in the ETF's basket of 26 holdings include Bancolombia S.A. (CIB), Ecopetrol S.A. (EC), and Grupo de Inversiones Suramericana S.A. (GIVSY). The ETF trades just over 100,000 shares per day and has an average spread of 0.49%. As of Aug. 9, 2019, GXG charges a 0.61% management fee and has slumped nearly 13% year to date.

The ETF's share price advanced nearly 40% from its December low to March high but has remained in range-bound conditions since. Price staged a strong bounce near the May swing low at the $8.40 level that now acts as a vital support area. Traders who take a long position should think about setting a profit target between $9.80 and $10, where the price may run into some overhead resistance from multiple swing highs that have formed over the past five months. Manage downside risk by setting stops beneath the last red candle's low at $8.52.

Chart depicting the share price of Global X MSCI Colombia ETF (GXG)

iShares MSCI Chile Capped ETF (ECH)

With net assets of $364.86 million, the iShares MSCI Chile Capped ETF (ECH) has a mission to provide similar returns to the MSCI Chile IMI 25/50 Index. The underlying index covers the entire market-cap spectrum of Chilean companies. Utilities, financials, and consumer goods command the lion's share of sector exposure with respective allocations of 25.77%, 22.24%, and 14.11%. Electric power utilities giant Enel Americas S.A. (ENIA) takes the top individual stock weighting at 10.03%. The fund's top 10 holdings carry a combined weighting of roughly 60%. A narrow 0.06% average spread and daily dollar volume liquidity of $12.61 million make the fund suitable to all trading styles. ECH has an expense ratio of 0.59% and is trading down just shy of 11% on the year as of Aug. 9, 2019.

ECH shares have oscillated within a broad falling wedge pattern over the past 12 months, helping to set clear support and resistance areas. Sellers took control of price action throughout most of July before buyers stepped up to the plate at the pattern's lower trendline in early August. Traders who expect further upside should look for an initial move to the wedge's top trendline, before a possible run-up to the next level of resistance at $43. Protect trading capital by placing a stop loss about $1 below yesterday's closing price.

Chart depicting the share price of iShares MSCI Chile Capped ETF (ECH)
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