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To Love Or To Leave Latin America ETFs

ETF Professor

Emerging markets equities and the corresponding exchange traded funds are slumping this year. Some Latin American economies are contributing to the trend. The The iShares Latin America 40 ETF (NYSE: ILF) is down 11.6 percent year-to-date as of Sept. 14, a loss that is 120 basis points worse than that of the MSCI Emerging Markets Index.

A variety of issues — including slumping commodities prices, the strong dollar, rising U.S. interest rates and political volatility — are plaguing Latin American equities this year.

What Happened

“If you’re an investor, there’s a lot to fret about in Latin America right now. NAFTA’s future is up in the air,” Martin Small, head of U.S. iShares at BlackRock, said in a recent note. “The region’s two largest economies, Mexico and Brazil, have elected or are likely to elect populist presidents. Argentina is struggling with a massive financial squeeze and a run on its currency.”

The $1.06-billion ILF features exposure to five countries: Brazil, Mexico, Chile, Peru and Colombia. Of the single-country ETFs tracking those nations, only the iShares MSCI Mexico ETF (NYSE: EWW) is positive on a year-to-date basis. Three of the other four ETFs tracking stocks in specific Latin American nations are saddled with double-digit losses this year.

Why It's Important

The iShares MSCI Brazil ETF (NYSE: EWZ) is the worst offender among the ETF's representing the aforementioned five countries. EWZ is down more than 21 percent year-to-date, but there are indications stocks in Latin America's largest economy could be oversold.

“All of our panelists agreed that Brazil currently appears to represent Latin America’s most attractive investment opportunity,” said Small. “Despite the political turmoil (former president Lula da Silva is campaigning from prison), the central bank has managed to keep the currency relatively stable and inflation within a reasonable range.”

As is often the case, Brazilian stocks are risky based on volatility alone. Year-to-date, EWZ's annualized volatility far exceeds the comparable metric on the other Latin American single-country ETFs and is 600 basis points above the annualized volatility on ILF.

What's Next

If local investors throughout Latin American regain some lost confidence, that could be an important catalyst for the region's downtrodden equity markets.

“Equity markets in Latin America have traditionally been driven by foreign investors, but that balance is changing as the domestic investment culture grows,” adds Small. “Local market participants, who have more skin in the economic game, are adding new perspectives and pricing information to the mix. That diversity of interests can present opportunities.”

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