Global X announced today the launch of the first pure play Argentina ETF, bringing to market another option for accessing South America. The Global X FTSE Argentina 20 ETF (ARGT) will seek to replicate the FTSE Argentina 20 Index, a benchmark that includes the top 20 companies within the investable universe of Argentina-domiciled companies or companies that have substantial revenues or assets in Argentina. “ARGT provides a relatively cost effective way to access the second largest economy in South America, a glaring hole in the existing ETF offerings,” said Bruno del Ama, chief executive officer of Global X Funds.
ARGT is the first ETF to offer pure play exposure to Argentinian equities, and continues a trend of expanding options for investing in South America beyond Brazil. Recent years have seen the introduction of iShares ETFs focusing on Chile (ECH) and Peru (EPU), while Global X has debuted a Colombia ETF (GXG) and an ETF that offers exposure to the Andean nations of Peru, Chile, and Colombia (AND). While Argentina is included in a handful of international equity ETFs, no existing products made a material allocation to the country. Argentina makes up about 7% of the Guggenheim Frontier Markets ETF (FRN) and about 4% of the Steel Index ETF (SLX) [try the free ETF Country Exposure Tool].
Argentina: Big Opportunity, Big Risk
Though it is home to the second largest economy in South America and boasts relatively high quality of life and literacy rates, Argentina is classified as a frontier market by MSCI. The Argentinian economy has a bizarre and uneven history, including periods of tremendous growth and other stretches of sharp contraction. A century ago Argentina was one of the largest economies in the world, only to fall behind other economic superpowers thanks to decades of mismanagement [see the Seven Most Corrupt Country ETFs].
Argentina is rich in natural resources, currently one of the largest exporters of beef, citrus, corn, soybeans, and wheat. Thanks in part to the tremendous rally in agricultural commodities in recent months, Argentina’s economy has been red hot as of late. The Argentine economy expanded by more than 9% in 2010, a huge increase over the 0.9% growth turned in during 2009. President Cristina Fernandez also indicated recently that unemployment dipped to 7.3% in the fourth quarter of 2010, down from 7.5% in the previous quarter.
Fernandez, who is in the final year of her four year term and is expected to seek reelection in October, recently laid out an ambitious plan designed to deliver 5% annual GDP growth through 2020. At the heart of her proposal are policies focusing on spurring domestic demand and import substitution. The treatment of imports has been hotly debated in Argentina; some see favorable import terms for foreign goods as a boon to middle-income consumers, a key demographic.
A recent statistical release highlighted a potential hurdle for the Argentine economy; according to the National Institute of Census and Statistics, the January 2011 trade surplus was 58% lower than the trade surplus recorded during the same period in 2010. Exports jumped 22% year-over-year, but a 52% jump in imports has raised concerns about the financial impact of government policies. In response, Argentina has stepped up trade barriers, expanding the list of products that require a non-automatic license to be imported and applying anti-dumping duties to some Chinese goods.
Another major concern in Argentina is inflation, a metric that is assigned different values by different parties. The government reported 2010 inflation of just under 11%, and is targeting 8.9% this year. But trust in the government’s inflation figures is minimal since a change in methodology a few years ago; private firms and economists believe that actual inflation is as high as 30% annually [see Beyond TIP: 10 ETFs To Protect Against Inflation].
Under The Hood
The index underlying ARGT has its heaviest allocations to the energy (34%) and financial (21%) sectors, a common feature of emerging markets funds. Technology, telecom, and materials each account for about 10% of assets, followed by consumer staples (8%) and utilities (7%). The largest individual holding in oil & gas equipment manufacturer Tenaris S.A. (20%), followed by e-commerce site MercadoLibre (10%) and Banco Macro (9%).
Disclosure: No positions at time of writing.