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Argentina ETF Tumbles on Default

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Argentina has eventually defaulted on its debt payments after it failed to strike a last-minute deal with the so-called “vulture fund” bondholders. This represents the second default in 13 years and the third in 25 years, and aggravated the decade-long legal battle between a small group of hedge funds led by billionaire Paul Singer’s Elliott Management and the Argentine government.

Backdated Crisis

The chaos stems from Argentina’s last default in late 2001 wherein the country resolved the situation by large-scale debt restructuring. Majority of the bondholders, say about 93%, have agreed on the terms and took a 70% write-down but a small group of hedge funds refused to accept the offer. This small group is often known as vulture funds (read: Top ETF Stories of July).

The crisis deepened in late June when the U.S. Supreme Court ruled that the country could not make payments to its restructured bondholders unless it paid off the holdout bondholders. The holdout creditors are demanding full value of their bonds ($1.5 billion), which the Argentine government has rebuffed as illegal. This is because Argentina might also have to pay the full amount to the restructured bondholders if paid to holdouts.

As a result, the country missed on an interest payment of $539 million on the bonds to restructured bondholders due July 30.

Market Impact

The default has raised fears over the instability in the country. It will likely diminish foreign reserves, stoke inflation, weaken currency, increase borrowing cost, and send Latin America’s third-largest economy into deeper recession (read: Falling Peso Undermines Argentina ETF).

However, the malaise is not expected to spread to the other markets and might not be severe as the last default when the customer savings accounts were frozen. This is especially true as the move was expected and investors are well aware of the financial conditions of the government.

Further, the U.S. ruling forced Argentina to miss the payment by blocking the deposits of interest payment. The country currently has nearly $29 billion in reserves, which is more than enough to pay all its bondholders.

The Merval stock index dropped as much as 8.5% while the ETF targeting the nation – Global X FTSE Argentina 20 ETF ((ARGT - Free Report) ) – fell as much as 7% on Thursday’s trading session. The fund slightly recovered at the close shedding 4.09% on elevated volume of more than 12 times a normal day (see: all the Latin American ETFs here).

ARGT in Focus

The ETF provides exposure to 21 largest and liquid Argentine-linked ADRs (American depository receipts) listed in the U.S. by tracking the FTSE Argentina 20 Index. The fund has amassed $33.6 million in its asset base and charges 75 bps in fees and expenses.

With respect to individual holdings, the product is highly concentrated on the top firm - Tenaris (TS - Free Report) – at 17.8% while YPF SA (YPF - Free Report) and Mercadolibre (MELI - Free Report) round off the next two spots with double-digit allocation. The three firms lost 4.1%, 9.1% and 1.7%, respectively.

Other firms such as Pampa Energia (PAM - Free Report) , Telecom Argentina (TEO - Free Report) , BBVA Banco Frances (BFR - Free Report) and Grupo Financiero Galicia (GGAL - Free Report) , accounting for a sizable exposure in the fund’s portfolio also contributed to the decline. These stocks are down 8.8%, 8.3%, 7.4% and 5%, respectively, and account for a combined 17.6% (read: 4 Great Reasons to Buy These Top Ranked Tech ETFs).

The ETF is skewed toward small securities as these account for 58% of total assets, while large and mid caps take the rest with 27% and 16%, respectively. From a sectors look, energy takes the biggest chunk, followed by materials, financials and technology. The fund currently has a Zacks ETF Rank of 4 or ‘Sell’ with High risk outlook, suggesting continued underperformance in the coming months.

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