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Commodities Bust Weighs on Latin America ETFs


As a decade-long commodity boom wanes, Latin America exchange traded funds are slumping.

Broad Latin America ETFs have stumbled this year. The iShares S&P Latin America 40 Index Fund (ILF) is down 13.0% year-to-date and the SPDR S&P Emerging Latin America ETF (GML) is down 14.3%.

“There’s a paradigm shift — rising rates and negative export growth at a time when the commodity cycle has ended,” Gustavo Arteta, a currency strategist at UBS AG, said a Bloomberg article. “The region’s countries have been exposed and have to adjust to confront the changes.”

Commodity prices have dipped 0.7% this year, the first decline since 2008. Meanwhile, the Bloomberg JPMorgan Latin America Currency Index of the region’s six most-traded currencies declined 9.6% this year and is hovering close to a four-year low.

Projecting average growth for the countries in the region to hit 2.88% in 2014, economists believe growth in Argentina and Chile will slow down next year while a recovery in Brazil stalls.

“We can sum up this year’s performance in stronger growth in the U.S. and weaker growth in emerging markets,” Eugenio Cortes, the head of currency forwards at EuroAmerica Corredores de Bolsa SA in Santiago, said in a telephone interview Dec. 23. “The long-term trend is for emerging-market currencies to continue weakening, maybe at a slower rate.”

When investing in overseas markets, investors are subject to currency risks. For instance, international ETFs hold foreign-currency denominated securities, and if the foreign currency depreciates, the ETF will show lower returns when converted back into U.S. dollars.

The Brazilian real depreciated 12% this year. The WisdomTree Brazilian Real Fund (BZF) is down 7.8% year-to-date. Meanwhile, the iShares MSCI Brazil Capped ETF (EWZ) , which tracks Brazilian real-denominated large- and mid-cap stocks, has declined 17.5% year-to-date. [Tapering Could Slam These Two EM Currencies]

On the other hand, Mexico is expected to benefit from trade growth with a recovering U.S. economy and increased foreign direct investments as the government opens its oil industry.

“For the Mexican peso, our scenario is positive partly because of the country’s proximity to the U.S., and the recovery there will have a positive effect on the currency,” Sebastian Brown, an economist and currency strategist at Barclays Plc, said in the article. “The energy reform will have an important effect in increasing Mexico’s attractiveness for foreign investors, and the currency has some space to strengthen versus the dollar.”

The iShares MSCI Mexico Capped ETF (EWW) is down 2.4% this year. [A Fiesta Could Await the Mexico ETF in 2014]

For more information on Latin American economies, visit our Latin America category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.