Van Eck, the New York-based ETF issuer known for its hard assets and targeted international funds, has filed for a new ETF focusing on small cap stocks in Latin America. The Latin America Small-Cap ETF (LATM) would track the Market Vectors LatAm Small-Cap Index, a modified cap-weighted benchmark designed to track the performance of publicly-traded companies that are domiciled and listed on an exchange in Latin America or that generate at least half of their revenues in Latin America. As of December 21, the index consisted of 75 securities with a total market capitalization of more than $80 billion.
LATM would become the only the third ETF focusing on Latin America, joining the iShares Latin America 40 Index Fund (ILF) and SPDR S&P Emerging Latin America ETF (GML). The indexes underlying ILF and GML have median market capitalizations of about $9 billion and $1.2 billion, respectively. Both ETFs allocate more than 60% of their holdings to Brazilian stocks.
In May of this year, Van Eck launched the Market Vectors Brazil Small-Cap ETF (BRF) as an alternative to the iShares MSCI Brazil Index Fund (EWZ). This fund has been a smash hit, in terms of performance and appeal to investors. Since its launch BRF has gained more than 100%, putting it well ahead of EWZ (up only 55%) during this period. BRF has seen cash inflows of $480 million through November, making it one of the most successful new ETFs of 2009 (only VXX has taken in more cash among funds launched this year). Van Eck is no doubt hoping for a repeat performance with LATM.
The Same, But Different
When BRF was launched, it seemed as if it would compete directly with the Brazil ETF from iShares, EWZ. While these two funds are similar in that they both target Brazilian equities, their holdings and the exposure they offer are in reality radically different. Investors should distinguish between these funds just as they do between ETFs tracking the S&P 500 and the S&P SmallCap 600 domestically.
Van Eck’s plan to introduce LATM highlights a huge area of potential growth for the ETF industry. While U.S. investors can access almost every corner of the globe through exchange-traded products, the majority of the funds offering this exposure focus on mega-cap companies that generate their revenue throughout the world. iShares, for example, offers a line of about a dozen country-specific European ETFs that are dominated by holdings in mega-caps. While these companies are certainly impacted by events in their home country, they generally have a high correlation with global markets as well
In addition to Van Eck, other ETF issuers will likely be watching LATM very carefully to gauge the market’s reaction. If it receives even half the welcome that BRF did, expect more small cap international funds to come rolling out in 2010.
Disclosure: No positions at time of writing.