Investing in Latin America

Six weeks into 2008 and the US markets are down anywhere from 7% to 12%. The emerging markets as a whole have held up fairly well considering that they do carry more risk than the US indices. The iShares MSCI Emerging Markets ETF (EEM) is down 8% in 2008. During a rough patch it is often helpful to find the ETFs that show strong relative strength versus its peers.

When analyzing the emerging market ETFs, there is only one that boasts a positive return in 2008: the iShares Malaysia ETF (EWM) is up 4%. The next two are the iShares Mexico ETF (EWW), iShares Chile ETF (ECH), and iShares Brazil ETF (EWZ), with losses o f 1%, 2.3%, and 2.5%, respectively. The crowd favorite, iShares FTSE/Xinhua China 25 ETF (FXI), is down 12%, but well off earlier 2008 lows.

After Malaysia, the top three all have one thing in common = Latin America. All emerging countries have political risk associated with them, some much higher than others. Many of the Southeast Asian countries are considered above average risk and so are countries that are considered “top heavy” in the political system (Russia, China, etc.). What makes Latin America, specifically Brazil and Mexico, attractive is the stable government in place and the concentration on growth. Brazil is very rich in commodities and could be considered a secondary commodities play for your portfolio. Mexico benefits from its proximity to the US and the emerging countries of Latin America.

Investors interested in putting some money to work in Latin America could take one of two routes. The first would be to invest directly in stocks and single-country ETFs in the hopes of beating the indices. This strategy is only suitable for investors that have the knowledge and time to do their due diligence. The second strategy would be to buy the iShares S&P Latin America 40 ETF (ILF). The ETF invests in three countries: Brazil (64%), Mexico (26%), and Chile (7%). There is a strong concentration on materials and energy (52%), followed by telecom (15%). Year-to-date, ILF is in positive territory and has shown great relative strength versus the rest of the global markets. For the investor that wants exposure to the booming Latin American region, ILF is their ticket to ride.

Disclosure: My firm owns shares of FXI and ILF.

Comments

[Strategizer]

Would the current unrest cause by Chavez and the Columbia/Ecuador dispute put any dampers on Latin America? I see the funds are mostly in Chile and Brazil, but do you think this will have a broader impact across that region and sink these stocks, too? What about just a general pullback?

I was in a Fidelity Latin America fun and got out of it in late Nov '07 with about six others. Of all the funds I left, this is the only one that has a positive track after I got out.