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Forget Brazil ETFs, Focus on This Top Ranked Fund Instead

Zacks Equity Research

Brazil dominates the economy of South America, with about half the entire continent’s GDP from a PPP perspective. The Brazilian economy is suffering from slower growth and heightened inflation over the past two years, and is currently one of the weakest performing nations among the four BRIC (Brazil, Russia, India and China) countries.

While inflation currently stands at 6.49%, many fear a rise in the rate and a consequent stage of stagflation in the short term (read: Is It Time to Buy the Brazil ETF (EWZ)?). Slower growth and higher inflation would generally result in a strange situation in which measures taken to tame inflation might halt growth.

In fact, the International Monetary Fund cut its 2013 growth forecast for Brazil three times since July 2012. Now, Brazil is expected to grow 3.0% in 2013 – a much lower rate than China and a bit subdued from India’s growth projections (read: Is This China ETF About To Surge?).

Better Plays on South America?

Yet, apart from this giant, investors still have a number of solid options which could offer quality exposure to the growing Latin American region. One such region is the countries in the Andes Mountains, which outperformed Brazil but never received the same level of attention from investors.

This, often overlooked, region comprises the fast-growing economies of Peru, Colombia and Chile. Despite their bad history, these have turned out to be a relatively better option for ETF investors in recent times.

After all, these nations have higher GDP growth than Brazil with moderate inflation levels, suggesting steady growth in the near term (read: 3 Emerging Market ETFs Still Going Strong). Additionally, these countries are commodity rich which is an advantage at a time when commodity prices are rising.

Also, a stable political backdrop and a growing consumer market make these destinations an ideal choice for investors seeking to put in their money in this part of the world but outside Brazil.

With that being said, a look at the top ranked ETF could be a good choice to target the emerging Latin America market. One way to find a top ranked ETF in the emerging market space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio, we have taken a closer look at the top ranked fund in the space, AND, which has a Zacks ETF Rank of 2 or Buy. This suggests that the product would outperform its peers over the next one year.

Global X FTSE Andean 40 ETF (AND)

This is the only way to target exposure to the three emerging countries through one basket of stocks without other nations being involved. The fund seeks to match the price and yield of the FTSE Andean 40 Index, before fees and expenses. 

The fund holds 44 largest stocks from all the three Andean nations, Chile, Peru and Colombia. It is largely spread across individual securities. The top three firms – Ecopetrol (EC), Enersis (ENI) and Southern Copper (SCCO) – comprise only 17.71% of the combined share in the basket. 

In terms of sector allocation, 27% of the fund is allocated to financials and 21% to basic materials while energy (16%) and utilities (15%) round out the next two spots in the basket.

From a country exposure perspective, Chile gets the first spot in the list with a share of 37% while Colombia takes the second position with 36% allocation. Peru holds the last position with a share of 9% (read: Andean ETFs: A Better Way to Play Emerging Markets?).

Despite being the only ETF available for investors to make a broad play in the Andean economies, the ETF is not popular among investors as implied by its trading volume of just 7,000 shares a day. Additionally, since its inception, in early 2011, the fund has been able to accumulate AUM of just $9.9 million. The product charges 72 bps in annual fees from investors.

Currently, the fund is underperforming, having lost about 9.81% in the year-to-date timeframe and 1.01% over the trailing one-year period. But, the ETF yields a decent 1.97% in annual dividends.

From the above chart, the fund is in the oversold position as indicated by lower RSI and Williams % R, signaling investors to buy this Andean ETF. Though the product has been the worst performer so far in the year, it is expected to move higher due to the reversal signal in the trend.

Based on both the fundamentals and technical analysis, AND could be a solid choice for investors who want to benefit from the current underperformance of the fund, and are looking for a rebound in South American investments in the second half of the year. 

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Read the analyst report on AND

Read the analyst report on EWZ

Read the analyst report on EC

Read the analyst report on ENI

Read the analyst report on SCCO

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