Eric Dutram: While the global economic picture may not be that bright, the conditions tend to be very different when one takes a look at specific nations. For this reason, a look to certain areas of the world could lead to outperformance, especially in this uncertain time where diversification is more necessary than ever.
Due to this market rockiness, investment in fast growing emerging market economies has become a very popular tool among many investors. Yet, when it comes to investment in emerging market economies, investors usually look to the mega economies like China or India. But beyond these, there are still many more options existing for investors that can still provide great exposure to developing nations.
In this article we would like to highlight the emerging market of Latin America. Of late, the commodity rich region has been in the limelight when it comes to investing in the emerging markets (Latin America ETFs: beyond Brazil).
In Latin America investing, the first thought which comes to mind is usually Brazil. In fact, half of the ETFs tracking Latin America invest a major portion of their asset base in the large South American nation.
However, this might mean that investors are overlooking several other nations in the region, specifically those in the Andean area, which have outperformed Brazil, but never receive the same level of attention from investors (Brazil ETFs: More Trouble On the Horizon?)
This often overlooked region is composed of the fast-growing economies of Peru, Colombia and Chile. Though these economies have had a bad history, in recent times they have turned out to be a relatively better option for ETF investors.
After all, these nations have higher GDP growth than Brazil with moderate inflation levels, suggesting steady growth in the near term (Three Overlooked Emerging Market ETFs). Additionally, they are commodity rich regions which add to their advantage at a time when commodity prices are rising.
Also, stable political situations and rising consumer market make these destinations an ideal choice for investors seeking to put in their money in this part of the world but beyond the behemoth of Brazil (Top Three Emerging Market Consumer ETFs). Below we discuss the ETFs available in the market to play this slice of the economy.
The Chilean economy is an intriguing choice for investors seeking to invest in Latin America. Chile has turned out to be one of the strongest economies outperforming Brazil and Argentina (Forget the BRIC ETFs, Focus on the PICKs). The International Monetary Fund (IMF) expects the Chilean economy to grow at the rate of 4.3% in 2012.
Chile is also known for its abundance in minerals and is the largest producer and exporter of copper. The tie ups with Asian economies may help the region to set off the losses incurred due to the weak European market.
However, investors should note that after a strong recovery, the growth momentum in Chile has been slow in recent times attributable to the deepening global woes. Copper prices have slowed down and unemployment level has seen an increase.
Despite some gloomy factors, the region remains an interesting choice for investors. Investors seeking to tap this corner of the market in an ETF form, the iShares MSCI Chile Index Fund (NYSEARCA:ECH) looks to be the top choice.
The product tracks the MSCI Chile Investable Market Index which produces a fund that holds about 40 securities in its basket. The fund appears to be concentrated in the top 10 holdings with asset investment of 62%.
Among sector allocation, Utilities, Industrials, Financials and Materials are the top four choices for the fund with double-digit allocation. The fund charge investors a fee of 59 basis points and generates a yield of 1.55% in the process.
Investors should note that Peru is also one of the interesting options in the catalog of Latin America ETF investing. Recent data shows that the Peruvian economy expanded at the rate of 5.3% and, according to International Monetary Fund, the region is expected to grow at the rate of 5.9% in 2012. The growth of the economy is being driven by strong external and domestic demand. Additionally, Peru is one of the largest producers of gold and silver (Peru ETF Investing 101).
The recent downturn in the U.S. has impacted commodity prices worldwide which also slowed down the growth of the Peruvian economy. However, with the announcement of Q3 by the Fed, commodity prices were on the rise once more, which once again gave a boost to the economy (Commodity ETFs in Focus as Fed Unleashes QE3).
Investors seeking to tap this attractive economy in ETF form could do so by investing in iShares MSCI All Peru Capped ETF (NYSEARCA:EPU). EPU is the only ETF offering a pure play in Peru. The fund tracks the MSCI All Peru Capped Index and holds a very small basket of 28 stocks. Materials and Financial stocks play a dominant role in the holdings profile as the two sectors combine to make up 77.86% of assets.
The top 10 holdings also take away a major chunk of the asset base of $336.2 million. In this asset base, the top 10 holdings get a share of more than 70%. The fund charges a fee of 59 basis points from the investors and has a yield of 2.42% per year.
The Colombian economy has also turned out to be extremely popular when it comes to investing in the emerging markets of Latin America. Colombia is a region which has immense unexploited natural resources, especially in the areas of oil and coal. The region also has close U.S. ties and a strong fiscal position.
Earlier, the country was politically not very stable but things have changed and there has been a vast improvement. Another factor which in the past led investors to stay away from investing in this country is the historically high rate of inflation. Fortunately, the scenario is different right now with inflation well under control thanks to sound government policies (Colombia ETFs Head-to-Head).
Investors seeking to invest in this part of the Latin American region have two choices available, the Global X FTSE Colombia 20 ETF (NYSEARCA:GXG) and the Market Vectors Colombia ETF (NYSEARCA:COLX). Both these funds offer a pure play in the Colombian economy. But investors should note that GXG was first implemented to tap the economy and COLX was launched in 2011.
With that being said, GXG manages a somewhat higher asset base with a higher trading volume compared to COLX. While GXG has an advantage over AUM and volume, COLX has an edge in expenses and boasts of a greater number of holdings.
COLX provides exposure to 27 Colombian stocks, 3 more than GXG. COLX charges a fee of 75 basis points annually which is also 3 basis points lower than GXG. Financials, Energy and Materials are the top three choices among sectors for both the fund.
Andean Broad Based
Investors who seek to cover the three emerging market through one basket of stocks have Global X FTSE Andean 40 ETF (NYSEARCA:AND) available. This ETF specializes in providing exposure to the Andean economies instead of pure play in any single economy. This produces a fund which tracks the FTSE Andean 40 Index and provides exposure to 41 largest stocks from all the three Andean nation-states, Chile, Peru and Colombia
Despite being the only ETF available for investors to have a broad play in the Andean economies, the ETF does not seem to be popular among investors as implied by its trading volume of just 500 shares a day. Additionally, since its inception, in early 2011, the fund has been able to accumulate AUM of just $8.7 million.
From a country exposure perspective, Chile gets the first spot in the list with a share of 39% while Colombia takes the second position with 30% allocation. Peru holds the last position with a share of 11%.
In terms of sector allocations, 76% of the fund is allocated to these four sectors: Basic Materials and Financials each make up about 24% of the fund while Energy (15%) and Utilities (13%) round out the next two quarters of the total exposure profile.
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