With lackluster earnings and substantial political uncertainty in the U.S. and European markets leaving many investors unimpressed, the recent trend of investing in emerging and frontier markets figures to continue for the foreseeable future. As investors shed their home country bias and look to beef up the international allocations in their portfolios, many are exploring economies that were previously hard to access. Thanks in large part to the ETF boom, investors of all levels of wealth and sophistication have the ability to invest in markets around the world. Emerging markets are no longer limited to the major players of the BRIC; there are country-specific ETFs targeting everything from Colombia to the Philippines to Vietnam [try Free ETF Country Exposure Tool].
When evaluating foreign ETFs, many investors have noticed that the composition of the underlying portfolio doesn’t quite match up with what they might have expected. For example, the Global X Argentina ETF (ARGT, C+) has only about 75% of its holdings are companies based in Argentina. The other quarter is spread between Canadian, Chilean, and American investments that have some operation in Argentina [see Seven Surprising ETF Holdings].
That might seem strange–and even suspicious–but it’s simply a nuance of international equity ETFs. Below, we take a deeper dive into ARGT to explain why the country allocations you see on many international ETFs might not make immediate sense.
As Argentina has opened its economy, many companies headquartered elsewhere in the world have rushed in to invest in the abundance of natural resources and other assets. As a result, many of the companies that operate primarily in Argentina are actually headquartered thousands of miles away–often on an entirely different continent–and have their primary listing on an exchange far from Buenos Aires. The result doesn’t necessarily diminish the correlation to the local Argentinian markets–these stocks often react to the local economy–but it does produce a puzzling country allocation [see Latin America ETFdb Portfolio].
Natural Gas and Oil
As the largest natural gas producer in Latin America, many Canadian companies that feel the northern markets are over saturated have ventured south in search of better returns. As a key player in oil production in Latin America, Argentina used to export a fair amount of excess oil to Brazil. However, consumption is quickly catching up with production, now requiring the import of oil which makes up a third of the oil used annually. This shift has created even more interest from northern companies that have more advanced and efficient refining and production methods [see also ETFs To Play 9 Markets in Limbo].
Tenaris SA is a large manufacturer of piping for oil and gas pipelines, and has major operations in Argentina. But the company is actually headquartered in Luxembourg and shows up in the portfolio breakdown as an Italian stock since it’s listed on the Borsa Italiana.
Tenaris is the largest individual holding in ARGT at almost 19% of total assets.
Many of the Latin American retail companies operate outside of their home country, including Cencosud, the Chilean solution to Walmart. With Jumbo stores around Latin America, this shopping super center might as well call Argentina home since it now has more locations here than in Chile. This might partly be due to the fact that Argentina has nearly triple the population of Chile and Cencosud bought out all of its Argentinian rivals, but as the third largest retailer, it still has to fight with Brazilian Groupo Pao de Acucar and Mexican Walmart de Centroamerica for consumers [see ETFs For The World's Most Valuable Emerging Market Brands].
Cencosud, which makes up about 4% of ARGT, accounts for the Chilean components of this ETF.
The majority of foreign investments in Argentina are interested in mining and refining of metals like gold, silver, copper, and aluminum. While it is not one of the largest metal producing countries, Argentina is right next to Chile where many Canadian and American corporations have already set up shop and are expanding quickly looking for new opportunities. It may not have the amazing copper reserves of Chile, but Argentina is the 3rd largest global producer of boron, a metal used in glass, detergents, industrial magnets, and when combined with carbon create a highly durable compound that is used in the making of bulletproof vests [see also Everything You Need To Know About Frontier ETFs].
A handful of Canadian and U.S. mining companies, including Pan American Silver, Yamana Gold, Silver Standard Resources, and Goldcorp are found in the ARGT’s portfolio as they have substantial operations in the country.
Bottom Line: Nothing To Fret About
Though we highlighted ARGT, that fund is certainly not the only international equity ETF that consists of stocks that appear to be from other markets. The Russia ETF (RSX, B-) appears to have components from the U.K. and the Netherlands. The Vietnam ETF (VNM, C+) has components listed primarily in Thailand, Canada, Malaysia, and India. Even SPY technically has minor allocations to Switzerland and Ireland.
There are hardly any companies existing now that operate exclusively in one country; most generate revenue on multiple continents and in dozens of nations. In an increasingly interconnected global economy, sometimes the best way to get exposure to Argentina is through a company headquartered in Canada or Luxembourg.
Disclosure: No positions at time of writing.
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