While the correlations of various asset classes have increased significantly over the past decade, emerging market investing is nevertheless likely here to stay. Even if foreign market returns are now more correlated with U.S. returns, the higher growth of emerging markets is still appealing in its own right. For investors looking for a convenient vehicle which holds some of the largest and strongest names in Latin America, the iShares S&P Latin America 40 Index (ILF) may well be a worthwhile option to consider [see Free 7 Simple & Cheap All-ETF Portfolios].
Launched in October of 2001, ILF is a traditional, passive index-based ETF. As the name suggests, this fund is designed to mimic the holdings of the S&P Latin America 40 Index. This index includes the most liquid stocks of large companies in Brazil, Chile, Colombia, Mexico and Peru. ILF’s underlying portfolio is somewhat dynamic, as Colombian equities became eligible for the fund in August of 2011 after the S&P elevated the country’s status from frontier market to emerging market [see LatAm Centric ETFdb Portfolio].
What Makes ILF Unique
Although there are many emerging market ETPs targeting Latin America, most of the funds are country-specific. That being the case, ILF is unique in that it is one of the few funds to offer broad-based exposure to emerging Latin America. This ETF is also the only fund to replicate the S&P Latin America 40 Index [see Ten Commandments Of ETF Investing].
How It Fits
ILF could fit as either a core or complimentary holding in a relatively broad range of portfolios. Even conservative investors ought to have some emerging market exposure, and ILF is a convenient and reasonably-priced way to gain exposure to Latin American equities. Aggressive investors could look at this fund as more of a growth allocation and hold a larger percentage than more conservative investors primarily looking for the diversification angle.
ILF also may have some utility to traders looking to play the more volatile emerging markets. Correlations between individual markets in Latin America are relatively high, and so ILF could be of some use in executing bullish/bearish strategies [see Emerging Market ETFs: 7 Factors Every Investor Should Consider].
What It’ll Cost You
ILF’s 0.50% expense ratio is fairly priced relative to other offerings in the Latin America space, which have expenses averaging 0.64% with a range from 0.45% to 0.95% . This ETF is also available for commission free trading to TD Ameritrade account holders[see ILF Realtime Rating]
Under The Hood
This fund is designed to hold some of the largest and most liquid stocks in the five eligible Latin American markets. That said, it only holds 41 positions, so it is relatively concentrated; the top ten holdings represent almost two-thirds of total assets. Fund weightings are based on market cap, so the giant Mexican telecom company America Movil represents more than one-tenth of the entire portfolio, with Petrobras, Vale, and Itau Unibanco also accounting for major chunks [see ILF Holdings].
Despite its rather shallow portfolio, the fund is surprisingly well-balanced across sectors. Just over one-fifth of the fund is invested in financials, while consumer staples and basic materials companies also receive major allocations. This ETF is less diversified on a per-country basis, though, as two countries comprise more than three-quarters of the fund’s investment assets; Brazil takes the top allocation followed by Mexico. As Colombia and Peru are still quite small markets in terms of capitalization, they account for a fairly minimal portion in ILF.
Yield, Volatility and Performance
ILF features a semiannual dividend distribution. This ETF is likely to be more volatile than broad U.S. market indices, and it should offer a risk/risk profile similar to the popular MSCI Emerging Markets Index. From a performance perspective, ILF boasts a fairly impressive track record; this ETF shed a dismal 47.2% in 2008, but recovered strong in 2009 and 2010, gaining 91.2% and 15.5% respectively. This ETF lost 18.5% in 2011 as “risk off” sentiment drove many away from emerging markets in general.
When it comes to diversified Latin American investment options, there aren’t many funds that can go toe-to-toe with ILF. Investors may also wish to consider the following:
- iShares MSCI Brazil Index Fund (EWZ): This is the biggest fund in the Latin America space, offering country-specific exposure to the largest economy in the region.
- iShares MSCI Mexico Investable Market Index Fund (EWW): This is another popular country-specific ETF which targets Mexican securities.
- iShares MSCI Chile Index Fund (ECH): This ETF offers exposure to what is largely considered to be the most stable economy in Latin America.
- State Street SPDR S&P Emerging Latin America ETF (GML): This offering charges a slightly steeper expense ratio than ILF, however, it also boasts a deeper portfolio totaling over 130 securities.
Disclosure: Author owns shares of America Movil