More Than Just Brazil; Latin America ETFs Surge Ahead

by on August 30, 2010 | ETFs Mentioned:

When seeking out exposure to emerging markets, investors tend to gravitate towards the superstar economies of India and China, two markets that are expanding at mind-boggling rates as cities swell and the middle class becomes wealthier. But Latin America has been another critical driver of global GDP growth in recent years, as the resource-rich continent has strengthened relationships with Asian members of the BRIC bloc and become a key supplier of raw materials to the East.

Historically, exposure to Latin America has essentially meant exposure to Brazil. The continent’s largest economy (and BRIC component) has always been viewed as a significantly more attractive investment opportunity than neighboring markets; although Brazil is very much an emerging market, it is popularly considered a less risky choice than Colombia, Argentina, and other countries with tumultuous histories.

Brazil is still definitely the “go-to” country to gain access to South America, due to the abundance of developed natural resources, services, manufacturing, and mining sectors and its immense size which dominates the continent. A look at the holdings of the iShares Latin America 40 Index Fund (ILF) shows that Brazil accounts for about 60% of holdings. But as many investors have learned, there is a lot more to South American than just Brazil [see Brazil ETFs: Nine Ways To Play]. Thanks in part to the rise of the ETF industry, U.S. investors are now able to efficiently access equity markets around the globe, including smaller economies that would have been effectively out-of-reach not that long ago.

Beyond EWZ: Latin American ETFs

Brazil has been embraced as driver of growth, receiving tremendous hype in the past ten years as investors have flocked towards Brazilian equities. Due to the commodity-intensive nature of the Brazilian economy, Brazil ETFs are often among the most volatile equity funds, on both the upside and the downside. The most popular Brazil ETF, the iShares MSCI Brazil Index Fund (EWZ) has struggled in 2010, and lags far behind a number of other country-specific Latin America ETFs in the performance column [see all ETFs in the Latin American Equities ETFdb Category]:

Global X/InterBolsa FTSE Colombia 20 ETF (GXG)

When most Western investors hear Colombia, they think of drug-related violence and political instability. But the days of Pablo Escobar are long gone, and Colombia has enjoyed an economic transformation. The Colombian economy has thrived in 2010, benefiting from strong demand for petroleum, coffee, coal, gold, bananas, and cut flowers.

GXG has seen tremendous interest in recent weeks; assets now stand north of $50 million and average daily trading volumes have spiked as well. GXG tracks the FTSE Colombia 20 Index, a benchmark that measures the performance of the 20 most liquid stocks in the Colombian market. Top holdings for the fund include Petroleum Company Ecopetrol (20%), BanColombia (20%), and petroleum exploration company Pacific Rubiales Energy (9%). GXG charges an expense ratio of 0.86% [also see The Colombia ETF's Secret Sauce].

iShares MSCI Chile Fund (ECH)

Chile had its share of upheaval in February, experiencing the largest earthquake of the decade. But thanks to prudent fiscal policies–the administration had wisely stuffed its coffers when copper prices rallied several years ago–Chile has enjoyed significant policy flexibility to combat the global economic downturn. Chile relies heavily on Asia, specifically exports to China, driving the country’s growth.

This ETF hasn’t turned in quite the performance of GXG, but is has also been one of the top performers in 2010. ECH tracks the performance of the MSCI Chile Investable Market Index, a benchmark that measures the performance of the Chilean equity market and includes about 30 individual stocks. Top holdings include the energy and forestry company Empresas (14%), electric company Enersis (10%), and power generator Empresas Nacional de Electricidad (10%). ECH charges an expense ratio of 0.63% [also see Beyond The BRIC: Ten Country-Specific Emerging Market ETFs].

iShares MSCI All Peru Capped ETF (EPU)

Lastly, Peru has surged ahead thanks to trade liberalization and strong metal exports, giving the country’s GDP a lift. “Here in Peru, where memories are still raw of an economy in tatters from hyperinflation and a brutal, two-decade war against Maoist rebels that left almost 70,000 people dead, gross domestic product surged 9.3 percent in April from the same month of last year,” writes Simon Romero. Peru, the world’s largest producer of silver, has become an increasingly important trade partner to China. The country is expected to lead Latin America’s growth over the next five years, surpassing the growth rates of even Brazil.

This fund tracks the MSCI All Peru Capped Index, which includes about 30 Peruvian equities. Major holdings include Buenaventura Mining Company (18%), financial services company Credicorp (14%), and Southern Copper Corporation (13%). Like ECH, EPU charges an expense ratio of 0.63% [also read Beyond EWZ: Five Other Latin America ETF Options].

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Disclosure: No positions at time of writing.