Trying to Love Latin America ETFs Again
March 25th, 2014 at 8:15am by Todd Shriber
Latin America has been a minefield for investors over the past year. As much is confirmed by the iShares Latin American 40 ETF (NYSEArca: ILF) and the SPDR S&P Emerging Latin America ETF (NYSEArca: GML), which are off an average of 17% over the past 12 months.
In recent weeks, however, the scenario has changed for the better. Since the start of February, ILF is up 8.5% while the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is higher by nearly 11%. Once seemingly left for dead, Colombia ETFs have rallied as well with the Global X FTSE Colombia 20 ETF (NYSEArca: GXG) up 8.2% in the past month. The iShares MSCI Colombia Capped ETF (NYSEArca: ICOL) has surged 9.5% over the same time.[Brazil ETFs Tempt]
Still, the region presents ETF investors with the dichotomy of potential value and current volatility.
“Daily reports and images of worsening lawlessness and disintegrating state authority in Venezuela would seem sufficient reason to reduce holdings in Latin America, in our opinion, were it not for the fact that other regional opportunities offer a diametrically contrasting appeal to investors,” said S&P Capital IQ in a new research note.
While populist policies have proven to be abject failures in countries such as Argentina and Venezuela, S&P Capital IQ notes there are opportunities in markets such as Mexico and Colombia, “where macroeconomic prospects remain sturdily grounded in a stable policy milieu that is committed to achieving sustainable, non-inflationary growth.”
The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is off 5.6% this year as negatives factors have been overshadowing the positives. Mexico initiated political and energy sector reforms last year and is expected to post GDP growth superior to that of the U.S. this year. [Mexico ETF is Forcing Investors Out]
However, Mexico remains a preferred Latin American destination for global investors due in part to comparatively strong political stability and those political reforms.
“The policy achievements of Mexico’s government under President Enrique Pena Nieto represent economic milestones. Passage of landmark legislation to introduce greater competition and remove bottlenecks in the petroleum-producing and telecommunications sectors represents success in just the first 15 months of his term. Although enactment of the remaining bills on the president’s agenda rests with a reform-weary legislature, congressional approval seems within reach,” according to S&P Capital IQ.
In addition to EWW, investors can also consider the db X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX), the first Mexico ETF to offer a hedged peso feature. DBMX debuted earlier this year. With either DBMX or EWW, investors will access a market that is pricy compared to Brazil, Latin America’s largest economy.