Broad Latin America ETF Investing 101

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Exchange traded funds are a great way to tap into the economy of any part of the world. Easily, this approach offers up a far more diversified way to target stocks in a particular nation, especially in emerging markets.  

In particular, one region which always seems to be of interest is Latin America. This area seems appropriate for those who have a relatively long time horizon and an above-average risk appetite (Forget Argentina, Buy These Latin America ETFs Instead).

This has been especially true as of late as Latin America has been a center of attraction for many investors attributable to the growing economies of most countries in the area, along with a bright outlook. According to a report from Morningstar, the IMF’s economic outlook for Latin America stands at 3.7% in 2012 and 4.1% in 2013. So, the economy of Latin America is poised for positive growth going forward.

Countries within Latin America like Brazil, Mexico, Chile and Peru are also rich in commodities and have experienced outstanding growth over the past few years (Peru ETF Investing 101). These countries are expected to continue its economic expansion provided no extraordinary situation arises like a sudden fall in commodity prices. European debt woes and slower growth in China may have an impact on the region’s export as these Latin American countries are major exporters of commodities.

However, the recent Q3 announcement by the Fed had a positive impact on commodities. These natural resources, which before the QE announcement were either volatile or down, rallied on the announcement, suggesting a favorable climate for a commodity driven region like Latin America.

Another reason which can be cited for economic expansion in Latin America is the growing consumer market. Latin America has experienced a huge increase in middle class numbers as more than 50 million more middle class households were added to the ranks in 2011 alone (Top Commodity ETFs In This Uncertain Market).

 Thus, investors who are seeking other choices in emerging market ETFs, apart from China or India, have the emerging market of Latin America as a great option for ETF investing (Is ARGT A Better Latin America ETF Pick?). For investors seeking to play this trend in ETF form, the following series of Latin America ETFs could make for interesting picks:

First Trust Latin America AlphaDEX Fund (FLN)

Launched in April 2011, First Trust Brazil AlphaDEX Fund (FLN) is a passively managed ETF designed to track the performance of the Defined Latin America Index, a benchmark dominated by the stocks selected on the basis of the AlphaDEX screening methodology. It appears as though this strategy has paid off in the short term as FLN has been generating positive alpha thereby beating the benchmark index.

The AlphaDEX methodology for selecting stocks uses both growth and value factors for determination of the stocks to be included in the fund. In this way, investors get a blend of the top rated growth and value stocks in one fund. 48 stocks from Latin America comprise the FLN holding list with a total asset base of $6.4 million.

The fund appears to be pretty spread out as it invests 38.4% of its asset base in the top 10 holdings, which signifies that concentration risk is low in the fund. Among sectors, Consumer Staples, Materials, Industrials, Financials and Utilities enjoy double-digit allocation while weightings in Information Technology and Energy are light.

Among the Latin America emerging markets, Brazil enjoys the maximum allocation in its fund (Forget the BRIC ETFs, Focus on the PICKs). The fund has allocated 70.1% to Brazil followed by Mexico, the second largest economy of Latin America, which has been granted 15.6% of assets.

Among the rest only Chile gets double-digit allocation. The fund charges a hefty fee of 81 basis points which falls on the higher side of the category average.

MSCI Emerging Markets Latin America Index Fund (EEML)

The MSCI Emerging Markets Latin America Index Fund is the new entrant on the list of Latin America ETFs. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the emerging market of Latin America, as measured by the MSCI Emerging Markets Latin America Index.

Since it is a newly launched ETF, the fund has been able to amass an asset base of just $4.9 million which it seeks to invest in a large basket of 124 stocks. This asset base is mostly invested in the large cap securities of the emerging market of Latin America while the style favors growth stocks to value stocks (Emerging Market Small Cap ETFs: Freefall Continues).

The fund invests 41.3% of its asset in the top 10 holdings which suggest that the fund is moderately concentrated in the large cap equities. Additionally, Brazil occupies the top position in the fund country exposure, so the ETF relies heavily on Brazil to set the pace of the product.

Among the sectors that the fund is most concentrated in, Financials and Materials hold the lion’s share making up 41% of the total investment. For the investment made in the ETF, the investor pays an expense ratio of 49 basis points which is on the lower side of the category average.

S&P Latin America 40 Index Fund (ILF)

S&P Latin America 40 Index Fund is one of the oldest and the most popular ETFs, which gives exposure to the emerging market economy of Latin America. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Mexican and South American equity markets as represented by the Standard & Poor's Latin America 40 Index.

The product appears to be liquid as approximately 400,000 shares change hands on a daily basis and provides exposure mostly to the large cap stocks. The fund invests its $1,636.6 million of net assets in 41 stocks.

The fund appears to be highly concentrated in the large cap equities as the allocation to the top 10 holdings stands at 62.7%. Among country exposure, the fund has a tilt towards Brazilian securities, investing more than 50% of asset base while Mexico takes the second position with asset allocation of 27.7%.

Among the sectors that the fund is most concentrated in, Financials, Materials, Consumer Staples, Telecommunication and Energy enjoy double-digit allocation. For the investment made in the ETF, the investor pays an expense ratio of 50 basis points.

SPDR S&P Emerging Latin America ETF (GML)

The SPDR S&P Emerging Latin America ETF seeks investment results that generally correspond to the performance of the S&P Latin America BMI Index.

GML provides broader exposure to the emerging market of Latin America securities and holds a total of 135 stocks. GML has a total asset base of $114.8 million of which 38.8% is invested in the top 10 holdings suggesting that the fund has moderate concentration in the top stocks (Go Local With Emerging Market Bond ETFs).

Among sectors, a maximum of 20.9% is invested in Financials, 19.9% in Materials, and 17.1% in Energy while the fund is light on Health Care with just 0.16% of investment made in the sector. For the country allocation, the two largest economies of Latin America, Brazil and Mexico, get the top two spots. The fund charges a fee of 59 basis points annually.

Market Vectors Latin America Small-Cap ETF (LATM)

Market Vectors Latin America Small-Cap ETF provides exposure to the small cap equities of the emerging market of Latin America and tracks the Market Vectors Latin America Small-Cap Index. The fund holds a total of 153 small cap stocks and has a total asset base of $13.8 million of which 20.7% is invested in the top 10 holdings.

So, the fund appears to be diversified with assets not just concentrated in the top 10 but instead spread among other companies beyond the list of top 10. Among the different sectors, Materials and Consumer Discretionary occupy the top two positions with 50.4% of investment made in these two categories (Time for the Latin America Small Cap ETF?).

Market Vectors Latin America Small-Cap ETF charges a fee of 63 basis points for the investment. Small cap companies are more volatile than their large cap counterparts and may prove to be weaker than large cap companies at times of global crisis.

Among country exposure, Brazil enjoys the maximum allocation with Mexico and Chile also getting double-digit allocations in the fund.

 

ETF

Focus

Exp. Ratio

Total Assets

No. of Holdings

% In Top 10

FLN

Large Cap

0.81%

$6.4 million

48

38.4%

EEML

Large Cap

0.49%

$4.9 million

134

41.3%

ILF

Large Cap

0.50%

$1.60 billion

41

62.7%

GML

Large Cap

0.59%

$114.8 million

135

38.8%

LATM

Small Cap

0.63%

$13.8 Million

153

20.7%

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