While Latin America investing is often focused on the more recognized Brazil and Mexico ETFs and in particular iShares MSCI Brazil (NYSEARCA:EWZ) and iShares MSCI Mexico (NYSEARCA:EWW), there are several other investment opportunities stretching across other nations. This article will highlight some of the other available ETFs and their countries of origin.
Latin America is a large, but in some ways fragmented economic block. Latin America encompasses Mexico through Central America and into South America with a population of close to 600 million spread across 20 countries. From an economic perspective, there are several splinters since Mexico is part of the North American Free Trade Agreement. Some additional trading blocks are the Union of South American Countries and CARICOM, comprised of the Caribbean countries. Some additional countries have free trade agreements with the United States.
This article will focus on the following countries and their associated ETFs. While additional mutual funds could provide added diversification or investment opportunities, I'll just focus on ETFs. Additionally, one could purchase several individual stocks on U.S. exchanges.
Latin American Country ETFs
Source: Yahoo!Finance downloaded on March 16, 2011 and current as of download date.
Assets ($ Millions)
iShares MSCI Brazil Index
iShares MSCI Mexico Investable Market Index
iShares MSCI Chile Investable Market Index
iShares MSCI All Peru Capped Index
Global X/InterBolsa FTSE Colombia 20 ETF
Global X FTSE Argentina 20 ETF (NYSEARCA:ARGT) just began trading earlier this month and so has limited data available, but would also represent a good opportunity, especially as one of the larger economies in Latin America.
One should note that while these ETFs create significant financial and basic materials exposure, the sector allocations among the countries shows meaningful variation as noted below.
The first observation is that these countries lag the U.S. in technology and healthcare exposure but generally lead the U.S. in exposure to basic materials and energy. For example, EPU has almost 70% of its exposure to basic materials. This creates a very different set of investment issues than Mexico which is less concentrated. For example, an investor concerned about rising inflation might be more attracted to EPU.
Some glaring sector exposure differences also highlight the issue of concentration risk. The top three holdings in SPY represent around 8% of the assets, while the top three holdings in GXG are almost 50%, in EWZ almost 30%, and over 40% for EPU. At this level, it is very worthwhile to examine each of the individual companies. While at first glance, it might seem advantageous to simply create your own portfolio of individual companies since many major companies have American Despository Receipts. However, this would eliminate exposure to smaller growing companies that should develop as these markets grow and mature over time.
This economic development can further be seen by reviewing the equity market capitalizations within these countries relative to economy size.
|Country||2010 Total Equity Market Capitalization ($ millions)||2010 GDP (PPP basis) ($ millions)||Ratio||# of Companies||Average Size ($ millions)|
|United States||$ 17,283,452||14,624,184||118.2%||5,095||3,392|
While Chile appears to have significant market capitalization, the other countries lag the U.S. One observation is that its Price to Earnings ratio in its ETF is substantially higher than the other's. However, there are numerous potential reasons for why this might be the case. At the highest level, a low ratio suggests opportunities for growth and development. However, it could also be indicative of systematic challenges to the formation of larger companies. One aspect that is important to separate out from this ratio is whether the total market capitalizations are increasing due to share issuances from established or new public companies or from share appreciation at existing companies. Ideally, it would be from a mix of both.
While the larger market ETFs, such as EWZ and EWW offer limited diversification to SPDR S&P 500 Trust ETF (NYSEARCA:SPY), the smaller Latin American countries offer much lower correlations as noted below.
|Ticker||7/2009 - present||12/2007 - present|
Led by Brazil and Mexico, Latin America offers significant investment opportunities and provides added diversification to a portfolio primarily focused on the U.S. However, further analysis would be critical prior to making an investment decision.
For investors not interested in picking countries, there is the recently launched Global X FTSE Andean 40 ETF (NYSEARCA:AND) and the more established iShares S&P Latin America 40 Index (NYSEARCA:ILF). For investors seeking greater diversification, I would suggest ECH, EPU, and GXG. More focused investors can look for individual companies.
A more detailed fundamental analysis of the countries' policies, restrictions on capital and general macro economic conditions would be valuable prior to making an investment decision. The purpose of this article was to simply identify some options. Furthermore, there are many more focused ETFs within the larger markets such as Brazil and Mexico. I've identified some of the other Brazil options here.
Disclosure: I am long SPY, EWZ.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.