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Investing in Latin American economies can be a lucrative option for investors seeking exposure to the emerging market space. Most Latin American countries are rich in natural resources and have positive demographics with a younger population and rising middle class.
This has resulted in an increase in foreign capital flows in the form of direct investments and portfolio investments to Latin America throughout the past decade.
According to the IMF, the prospects for Latin America and the Caribbean remain promising, with economic growth expected to pick up pace from 3% in 2012 to 3.5% in 2013, well ahead of many regions.
This is largely thanks to improving economic policies, rising domestic demand and consumption, booming natural resources and the aftermath of earlier policy easing in some countries (read: Broad Latin America ETF Investing 101).
However, investors should note that since most countries in the region are commodity exporters, their growth rates are driven by the global economic environment, in particular growth in China and worldwide commodity prices.
Commodity prices worldwide have been under pressure for quite some time now, given the generic slowdown in global economic conditions. Also, the Chinese economy has been struggling to sustain growth in its industrial production and the broader economy (read: Is This China ETF About To Surge?). As a result, Latin American economies have been underperforming recently.
However, the long-term potential for the region remains attractive. Among the countries in the region, Brazil, Mexico, Colombia, Chile and Peru continue to put in impressive economic performance this year. Latin America's largest economy, Brazil, is now expected to grow 3.0% while Mexico, the second largest economy in the region, would see higher growth of 3.4% this year.
Latin America ETF in Focus
We have highlighted a handful of ETFs for investors looking for a pure growth play in this interesting slice of the market. Though these funds have posted a loss in the low single digits in the year-to-date timeframe, investors should take advantage of these beaten down prices and should consider them in their portfolio given the bullish outlook for the Latin American countries.
These ETFs currently have a Zacks ETF Rank of #1 or Strong Buy rating, suggesting that the products would outperform their counterparts at least over the next one-year period (see more in the Zacks ETF Center).
iShares Latin America 40 ETF (ILF)
Launched in October of 2001, this is one of the most popular and liquid ETF in the space with AUM of roughly $1.4 billion and average daily volume of more than 600,000 shares. ILF provides investors exposure to some of the largest, blue chips and most liquid stocks in five Latin American markets, namely, Brazil, Mexico, Chile, Peru and Colombia by tracking the S&P Latin America 40 Index.
The product holds 45 securities in its basket with heavy concentration across each security. It puts about 63% of the total assets in top 10 holdings. The Mexican telecom company America Movil (AMX) has been assigned more than one-tenth of the entire portfolio, with Petrobras (PBR), Itau Unibanco (ITUB), Vale (VALE) and Banco Bradesco (BBD) taking the next three positions.
However, in terms of sector exposure, the fund has a more balanced approach. The highest weighting goes towards financials, while consumer staples, materials and energy companies also get major allocations.
Among various nations, the fund has a tilt towards Brazilian securities in which it invests more than 50% of the asset base (read: Is It Time to Buy the Brazil ETF (EWZ)?). Mexico and Chile also get double-digit allocation in the fund while a very small portion has been assigned to Peru and Colombia. The fund charges a fee of 49 basis points annually.
Market Vectors Latin America Small-Cap ETF (LATM)
This fund provides exposure to the small cap equities of the emerging market of Latin America and tracks the Market Vectors Latin America Small-Cap Index. The fund holds a total of 147 small cap stocks and has amassed $10.1 million in its asset base, of which 20.54% is invested in the top 10 holdings.
So, the fund appears to be diversified with assets spread among other companies beyond the list of top 10. Each security holds less than 3% share in the basket, ensuring minimal company-specific risk. Among the different sectors, materials, consumer discretionary and financials occupy the top three positions with more than 20% share each.
Launched in April 2010, the product is quite expensive among the group charging 63 bps in annual fees from investors. In terms of country allocations, Brazil is at the top (38.9%) with Mexico and Chile also getting double-digit allocations in the fund (read: 3 Emerging Market ETFs Still Going Strong).
iShares MSCI Mexico Investable Market Index (EWW)
Since Mexico is expected to generate higher growth this year and might overtake Brazil in the coming years, according to some economists, the Mexico ETF could be a great pick (read: Why Mexico ETF is a Long-term Winner).
EWW tracks the MSCI Mexico Investable Market index which consists of stocks traded primarily on the Mexican Stock Exchange. The index is a capitalization weighted, aiming to capture 99% of the total market capitalization.
Launched in March 1996, the fund now has more than $2.7 billion in AUM and appears to be one of the popular choices among investors as indicated by its trading volume of more than 2.6 million shares a day. The ETF charges 50 bps per year in expenses.
With holdings of 46 stocks, the product is heavily concentrated across its top 10 firms (61.31% of assets). America Movil appears to be dominating the performance of the ETF as indicated by its allocation level of more than 17% in the ETF.
However, the fund appears to have done a good job in spreading the asset base across various sectors. Consumer staples (29.34%), telecom (18.23%) and materials (17.65%) are the top three sectors while financials and industrials also get a double-digit allocation (read: Defensive Sector ETFs Leading the Market).
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