Ultimate Guide To Latin America ETFs
Over the past few years, many investors have become acutely aware of the significant differences in the growth profiles of the world’s developing economies relative to advanced nations. Historically perceived as risky investments, emerging markets have now been firmly established as the primary source of global GDP growth, creating a surge in interest among U.S. investors. As these investors continue to cure themselves of the “home country bias” that has dominated asset allocation strategies historically, many are looking to Asia as a way to beef up exposure to emerging markets [see our Asia-Centric ETFdb Portfolio].
But there is a lot more to emerging markets exposure than China and India. In addition to looking to the east, U.S. investors
are also looking to the south for exposure to rapidly-growing economies. Latin America is full of resource-rich countries positioned to grow rapidly as both domestic and overseas demand continues to rise. Most investors maintain moderate exposure to Latin America through BRIC funds or diversified emerging markets ETFs. But for those looking to overweight Brazil and other South American economies, there are a number of ETF options available [see our LatAm-Centric ETFdb Portfolio].
Total Latin America ETFs
For investors looking to gain broad exposure to Latin American economies, there are a handful of broad-based ETFs that diversify holdings across the region’s largest economies:
|Latin America ETFs|
|Number of Securities||38||134||155||125||50|
|As of November 2012|
- iShares Latin American 40 Index Fund (ILF): This ETF tracks the S&P Latin America 40 Index, a benchmark that measures the performance of equity markets in Mexico, Brazil, Peru, Argentina, and Chile. ILF makes big allocations to the materials and financials sectors, including significant weights in mining giant Vale and energy firm PetroBras.
- SPDR S&P Emerging Latin America ETF (GML): This ETF is similar in many ways to ILF, but offers greater depth of exposure. GML currently invests in about 80 stocks, and gives the largest weightings to Brazilian and Mexican equities. GML is also heavy in the materials and financials sectors.
- Market Vectors Latin America Small Cap ETF (LATM): Whereas ILF and GML are dominated by mega-cap equities, this ETF invests exclusively in small cap stocks. The underlying Latin America Small-Cap Index has a weighted average market cap of just $1.4 billion, significantly smaller than most of the components of the large cap ETFs.
- iShares MSCI Emerging Markets Latin America Index Fund (EEML): This ETF is dominated primarily by giant and large cap equities, although it features a well-diversified portfolio from a sector breakdown perspective. Basic materials and financial services receive the greatest allocation followed by the consumer defensive, energy, and communication services sectors.
- First Trust Latin America AlphaDEX Fund (FLN): This ETF uses a set of fundamental criteria to objectively identify and select stocks from the S&P Latin America BMI Index which may generate positive alpha relative to traditional passive-style indexes. FLN is certainly the most expensive ETF in the space, although its unique methodology is well-worth the extra costs for those who find it compelling.
It’s important to keep in mind that the country allocations displayed on ETF fact sheets only convey the market where the stocks are traded, and may not reflect the geographic diversification of the underlying holdings. Many companies that operate primarily in smaller and less developed Latin American countries may be listed on the Brazilian or Mexican stock exchanges in order to facilitate foreign investment. So although these Latin American ETFs appear to be concentrated in just a few countries, the effective exposure often includes several additional economies [Download 101 ETF Lessons Every Financial Advisor Should Learn].
For investors looking for more targeted access to Latin American economies, there are a number of country-specific ETFs available:
|Latin America Country ETFs|
|As of November 2012|
- iShares MSCI Brazil Index Fund (EWZ): This ETF tracks the MSCI Brazil Index.
- Market Vectors Brazil Small Cap ETF (BRF): This ETF also offers exposure to Brazilian equities, but focuses primarily on small cap stocks (see a comparison of small cap ETF returns here).
- iShares MSCI Mexico Investable Market Index Fund (EWW): This ETF tracks the MSCI Mexico Investable Market Index.
- iShares MSCI Chile Investable Market Index Fund (ECH): This ETF tracks the MSCI Chile Investable Market Index.
- iShares MSCI All Peru Capped Index Fund (EPU): This ETF tracks the MSCI All Peru Capped Index.
- Global X/InterBolsa FTSE Colombia ETF (GXG): This ETF tracks the FTSE Colombia 20 Index, a benchmark that consists of the 20 largest and most liquid Colombian stocks.
- iShares MSCI Brazil Cap Index Fund (EWZS): This ETF offers exposure to smaller size companies not found in its large cap brethren EWZ. Top allocations by sector include: real estate, consumer cyclical & defensive, as well as industrials.
- Global X Brazil Mid Cap ETF (BRAZ): This fund is linked to an index that is designed to reflect the performance of Brazilian mid cap companies, allowing for investors to round out exposure to this lucrative corner of the nation’s equity market.
- Global X FTSE Andean 40 ETF (AND): This ETF tracks the performance of the 40 largest companies in Chile, Colombia, and Peru.
- DBX Strategic Advisors MSCI Brazil Currency-Hedged Equity Fund (DBBR): This ETF tracks the same index as the ultra-popular EWZ with a twist; DBBR hedges for currency exposure, effectively allowing investors to tap into Brazil’s equity market while retaining U.S. dollar-denominated assets.
- Direxion S&P Latin America 40 RC Volatility Response Shares (VLAT): This ETF tracks the S&P Latin American 40 Index with a twist; VLAT features a U.S. Treasury component which receives allocation based on the volatility of the underlying index. VLAT automatically adjusts allocations based on a specific volatility target which is derived from the benchmark’s historical volatility.
- Global X FTSE Argentina 20 ETF (ARGT): This ETF looks to track the performance of the top 20 companies within the investable universe of Argentina-domiciled companies or businesses that derive a substantial portion of their revenues from the nation.
- Van Eck Market Vectors Colombia ETF (COLX): This ETF is linked to the Market Vectors Colombia Index, which is comprised of roughly 50 companies that are domiciled or generate at least 50% of revenues in Colombia.
For investors with a higher risk tolerance and a less optimistic outlook for Latin America, there are a number of inverse and leveraged ETFs targeting Latin American equities:
|Leveraged & Inverse ETFs|
|Brazil||ProShares UltraShort MSCI Brazil (BZQ)||-200%|
|Ultra MSCI Brazil (UBR)||200%|
|Mexico||ProShares UltraShort MSCI Mexico Investable Market (SMK)||-200%|
|Ultra MSCI Mexico Investable Market (SMK)||200%|
|Latin America||Direxion Daily Latin America Bull 3x Shares (LBJ)||300%|
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Disclosure: No positions at time of writing.