Van Eck, the New York-based ETF issuer behind several of the most successful new product launches in recent years, introduced the Market Vectors Latin America Small-Cap Index ETF (LATM) on Wednesday. LATM, which will seek to replicate the performance of the Market Vectors Latin America Small-Cap Index, will be the first U.S.-listed ETF offering exposure to small cap stocks in Latin America. The underlying index consists of about 80 stocks that generate the majority of their revenues in Latin America.
While there are a number of ETFs offering exposure to Latin American stocks (see all ETFs included in the Latin America Equities ETFdb Category), LATM is the first to focus exclusively on those with a market capitalization of less than $5 billion. This distinction has proved to be a meaningful one for international equity investors, as the handful of small cap-focused ETFs currently available have exhibited risk/return profiles unique from more traditional mega-cap dominated funds (see a comparison of historical performances between small and large cap international ETFs here).
One such fund, the Brazil Small Cap ETF (BRF) launched by Van Eck last year, has been tremendously popular with investors, and has outgained the large cap-heavy MSCI Brazil Index Fund (EWZ) by a wide margin; BRF is up about 90% since its launch in May 2009 while EWZ has gained about 60% during the same period. Of course this performance is reflective of a relatively short time period–small caps performance won’t always be better than that of large caps–but the big gap demonstrates very clearly that the exposure offered by investments in stocks of different sizes is different.
Large cap Latin American firms tend to be more dependent on the global industrial cycle, while the success of small caps hinges more on real growth in the domestic economy. One easily observable difference between LATM and the mega-cap dominated S&P Latin America 40 Index Fund (ILF) is the greater emphasis on the consumer sector afforded by the small cap fund; consumer discretionaries and consumer staples account for about 26% of LATM’s holdings, about twice the weighting given to these sectors by ILF.
A quick look at the stats for LATM compared to ILF highlights the difference in size; ILF has an average market cap of about $37 billion, compared to lust over $1 billion for LATM.
The Case For Latin America
As investors have developed a renewed appetite for risk and reconsidered the efficiency of traditional investment philosophies that call for a major allocation to U.S. stocks, many have begun to dial up their exposure to the emerging markets of the world. While China and India have been perhaps the most popular options, Latin American equities have seen a surge in interest as well, and have been among the best performers since the market bottom in March 2009.
Part of the region’s resurgence is attributable to its abundance of natural resources. As the global manufacturing sector has shown signs of life and China has ramped up industrial production, demand for raw materials has surged. Brazil is now one of China’s largest trading partners, while a number of other Latin American countries are major global suppliers of various industrial and precious metals.
While strong exports have given Latin America a boost, there are reasons to be optimistic about the domestic economies as well. Rising incomes continue to contribute to an expanding and increasingly-wealthy middle class, similar to the phenomenon that has driven huge growth in China. Reforms of unfavorable business and investment laws in Chile and Colombia have opened the doors for much-needed foreign investment. And smart monetary policies in most of the region–most recently highlighted by Chile’s impressive response to a devastating earthquake–have much of Latin America in better fiscal shape than the developed world. As a result, Latin America is expected to continue to expand much more quickly than the G-7 nations for the foreseeale future. Read more about the case for Latin America here (PDF).
Under the Hood of LATM
LATM will give its largest allocation to Brazil (about 43% of assets), but makes additional allocations to companies listed in Mexico, Chile, and Argentina as well. It’s important to note that the geographic exposure offered by LATM goes beyond well beyond this handful of countries. Many of the component stocks are offshore companies listed in one of the aforementioned markets that generates the majority of revenue from other Latin American economies. As such, LATM also offers exposure to the local economies of Colombia, Peru, and Ecuador, among several others.
LATM invests in several companies listed in the U.S., Canada, and Australia that generate the majority of their revenues in Latin America. LATM will charge an expense ratio of 0.63%, below the average fee for the Latin America Equities ETFdb Category.
Disclosure: No positions at time of writing.