Latin American ETFs: Charging Higher

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Latin American ETFs are moving up mainly on expanding Chinese demand for natural resources. Commodity producers and long-term contracts for materials are attractive to China as inflation and deficit-proof assets. Domestic demand in Latin America continues to develop. In the meantime, a bet on Latin American ETFs is a bet on commodity prices, Chinese buying, and continued stability in the U.S. and Europe.This bet paid off well in 2010. Headline GDP growth is expected to slow but things continue to look bright for 2011. According to the Economic Commission for Latin America the Caribbean (ECLAC), 2011GDP for the region as a whole will be 4.2%. This represents a slowdown from 2010 levels, estimated at 6%. It remains substantially higher than estimates for U.S. and Europe.In 2010, pan-Latin American ETF iShares Latin America 40 Index (NYSEArca:ILF - News) par-performed the U.S. benchmark SPY.The chart below compares the performance compares the performance of ILF with the U.S. domestic benchmark SPY.

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ILF is diversified by region and by sector. Brazil currently represents 60% of the fund. Mexico gets about 25%, Chile about 10%, and 5% is allocated to Peru. Currently the largest sector is materials, but ILF allocates about 20% to financials, 15% to telecommunications and over 10% to telecommunications. Growth tends to come from natural resources, which account for over 50% of the regions exports.How did the individual companies that make up the holdings in ILF compare? The chart below compares the Chilean ETF, iShares MSCI Chile Investable Market Index (NYSEArca:ECH - News), iShares MSCI Mexico Index Fund (NYSEArca:EWW - News), and the MSCI All Peru Capped Index Fund (NYSEArca:EPU - News) outperformed. The large cap Brazilian Benchmark iShares Brazil Index (NYSEArca:EWZ - News) lagged. The chart shows winners and losers, a testament to diversity of its returns.

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Although the holdings in the above country-specific funds are a little different from those in ILF, their distinct performance indicates that the strong performance of ILF over the past year is mostly due to Mexico and Chile. EWZ saw no gains in 2010.The situation may reverse in 2011. Overall P/E ratios in Latin America are higher than in the U.S. ILF has a P/E ratio of 16 as opposed to 14 for the SPY. Within Latin America there is wide divergence. The Mexican ETF EWW has a P/E ratio of 18. Chiles ETF ECH is 28. Brazil has a P/E ratio of 12.These valuations suggest that Brazil is the preferred regional ETF play in 2011. Though this year it may not expand as fast as Chile, Brazil is expanding faster than Latin America as a whole. Last year Brazil's GDP grew by about 7.5%. 2011 GDP growth for Brazil is expected to be somewhat lower, but remain elevated. Challenges for Brazil are inflation, a rising currency and foreign capital inflows. Inflation is close to 6%. The Brazilian real has appreciated over 25% over the last two years. The increase is hurting the competitiveness of Brazils manufacturing sector. Policy interest rate in Brazil tops 10% attracting foreign capital.Chile is also struggling with peso appreciation. Its government is joining an increasingly long list of foreign governments buying dollars in the currency markets in order to protect the competitiveness of exports, in Chiles case primarily the dollar price of copper.Below a list of Latin American ETFs:Pan Latin American ETFsiShares S&P Latin America 40 Index Fund (NYSEArca:ILF - News), 0.50%SPDR S&P Emerging Latin America ETF (NYSEArca:GML - News), 0.60%Country SpecificiShares MSCI Brazil Index Fund (NYSEArca:EWZ - News), 0.61%iShares MSCI Mexico Index Fund (NYSEArca:EWW - News), 0.53%iShares MSCI Chile Index Fund (NYSEArca:ECH - News), 0.61%MSCI All Peru Capped Index Fund (NYSEArca:EPU - News), 0.51%Global X/InterBolsa FTSE Colombia 20 ETF (NYSEArca:GXG - News), 0.86%Sub-Sector BrazilBrazil Small-Cap ETF (NYSEArca:BRF - News), 0.71%EGS INDXX Brazil Infrastructure ETF (NYSEArca:BRXX - News), 0.85%Global X Brazil Consumer ETF(NYSEArca:BRAQ - News), 0.77%Short/Leverage Direxion Latin America Bear 3X - Triple-Leveraged ETF (NYSEArca:LHB - News), 0.94%Direxion Latin America Bull 3X - Triple-Leveraged ETF (NYSEArca:LBJ - News), 0.94%ProShares UltraShort MSCI Brazil Index Fund (NYSEArca:BZQ - News), 0.95%ProShares UltraShort MSCI Mexico Investable Market Index Fund (NYSEArca:SMK - News), 0.95%Jonathan Bernstein has been writing about ETFs since 2003 and is the author of Sector Trading: A Year in Exchange Traded Funds.

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