Investors should note that the product has hefty allocations to the top two firms – Tenaris (TS) and Mercadolibre (MELI) – at 20.42% and 19.50%, respectively. This suggests that company specific risk is too high and the top two firms dominate the returns of the fund.
Nevertheless, the recent outperformance in the ETF was driven by two of its five sizable holdings – Telecom Argentina (TEO) and Banco Macro (BMA). Both have surged over 23% and 26%, respectively, so far in August. The fund allocates at least 5% of total assets in both the firms.
The ETF is skewed towards small securities as these account for 44% of total assets, while large and mid caps take the rest with equal weightings. From a sector look, energy takes the biggest chunk, followed by technology, materials and financials, so there is definitely a tilt towards lower risk sectors (read: The Best ETFs in the Market’s Top Sector).
Further, the Argentina ETF looks cheap at current levels compared to many other emerging funds given its low P/E of 14.17 and P/B of 1.44. This low valuation along with the low sector risk is also responsible for the recent surge in the ETF.
To sum up, although the Argentine economy is showing some signs of improvement, it still has a long way to go. Investors should note that the overall outlook for Argentina is still quite negative and that some more pain could be in store for this nation given high levels of inflation.
We currently have a Zacks ETF Rank of 5 or ‘Strong Sell’ rating on ARGT. This suggests that the longer-term picture is still very weak for this fund, and that investors should not be fooled by this recent surge.
As such, investors should look at other markets in Latin America – or at least broader emerging market funds – for exposure, rather than taking risk on in an unlikely rally continuing in Argentine shares. While a further move higher in the near term is definitely possible in this beaten down ETF, the long term prospects are poor at best, suggesting that great caution needs to be taken when investing in this volatile market.
This article is brought to you courtesy of Eric Dutram.