Brazil has long been a favorite destination for investors seeking more Latin American exposure. This is for good reason, as the nation is one of the BRIC members, the largest economy on the continent, and has a rapidly growing consumer base along with a wealth of in-demand commodities. Unfortunately, the tide has begun to turn against Brazil in recent months as investors grow increasingly worried over the government’s policies and their impact on the economy. It appears as though many are bent on decreasing interest rates in order to stimulate demand, despite the fact that consumers are already highly leveraged in the country and inflation is by no means under control. As a result, many investors have decided to take a look beyond Brazil to some of the massive country’s neighbors in South America.
Of these countries, investor demand has been focused in on the Andean nations of Columbia, Peru, and Chile, thanks to their solid fiscal management, rapidly growing economies, and strong commodity bases. Yet, while these nations may be quality choices that are easily accessed via ETFs, most investors have overlooked another large economy in the region that could provide similar exposure; Argentina. The country is actually the second largest economy in the region and has the third biggest population, making it the third biggest Spanish-speaking economy in the world. Additionally, the country is also the second richest from a GDP (PPP) perspective in South America, as the average citizen pulls in close to $14,700 a year by this metric (read EGShares Planning 11 Emerging Market ETFs).
Thanks to the sheer size of the economy, it was somewhat surprising that there wasn’t more interest from ETF issuers to develop a product targeting the area. Fortunately for those seeking more exposure to the country, Global X recently debuted the FTSE Argentina 20 ETF (ARGT - ETF report) as a way to access this often forgotten market.
Argentina ETF In Focus
ARGT tracks the FTSE Argentina 20 Index which is a benchmark of companies based in the South American country across all market cap levels. Currently, the fund has heavy exposure to just a few sectors as materials (32.8%), consumer staples (24.4%), and telecom (16.2%) take up the top three spots. In terms of individual securities, Tenaris SA (TS - Snapshot Report) takes the top spot at just over 20.1% of total assets while YPF Sociedad Anonima (YPF - Snapshot Report) and Arcos Dorados Holdings (ARCO - Snapshot Report) round out the rest of the top three and take up another 20% of the total assets. Overall, the fund is pretty concentrated and has a definite tilt towards large cap securities, although it should be noted, this is really the only option available that targets this rather large economy at this time (also read Brazil Small-Cap ETF Showdown).
Unfortunately, the reasons for why there was so little interest in tracking this market could be due to the country’s lackluster economic environment and broad fears over a spike in inflation in Argentina. Currently, ‘official’ inflation is around 9.9% although unofficial reports put the real figure much higher, closer to 24%. Obviously this is far too high to promote confidence in the economy and given that the current president has vowed to push for more employment over reducing inflation, many are worried that this trend could continue well into the future.
This is especially troubling because the country is particularly sensitive to inflation and debt concerns as Argentina defaulted on its debt roughly 10 years ago, sending the country into a deep recession. In fact, inflation at one point was reaching over 10% a month during this tumultuous time, scarring present-day Argentines who fear a return to this type of economic environment. As a result of this, as well as a broad push away from emerging markets, ARGT has had a rough time since its inception in early March of last year as the product has tumbled by 30.9% since the launch. Furthermore, the fund has tumbled by close to 29% in the past six months although it has rebounded more recently, gaining just over 5% in the past three month period (read Does Your Portfolio Need A Hedge Fund ETF?).
These losses, while bad, are even worse when compared to other major Latin America ETFs. These funds such as the Andean region’s (AND - ETF report) , and Brazil’s (EWZ - ETF report) have lost 17.2% and 21.9%, respectively, in the time period, beating out ARGT by a pretty wide margin. However, ARGT has bounced back pretty strongly over the past six weeks, although this was obviously not enough to make up for its big slump earlier in 2011. Thanks to this, investors who are considering making a play on Argentina definitely need to be in tune with the country’s inflation expectations and how the South American nation looks to deal with this going forward and be ready for significant volatility (see Ten Best New ETFs Of 2011).
I for one am not too bullish on the Argentine economy and the ability of the country to keep inflation under control. The issue is just being swept under the rug and a lack of sovereign bond financing could limit their options going forward in terms of policy tools. Nevertheless, the dividend yield on the product is quite high—at nearly 4.5%-- and the P/E of the fund is quite reasonable, coming in below 12, suggesting that longer term investors could see some value if the country is able to get its act together. Either way, no matter if you are looking for a long or short play on the economy of Argentina, ARGT looks to be the best way to do it in ETF form, and could be an interesting choice for those looking for South American access beyond the usual suspects.
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