While the emerging markets have been rebounding this year, a small Latin America-focused exchange traded fund has been outperforming under the radar.
The Tierra XP Latin America Real Estate ETF (NYSEArca: LARE), which has $4.7 million in assets under management, has increased 29.8% year-to-date. Furthermore, LARE has come with an attractive 8.26% 12-month yield. In contrast, the iShares Latin America 40 ETF (NYSEArca: ILF), which takes the 40 largest Latin American companies, gained 23.5% so far this year and only offers a 1.81% yield.
Supporting the gains in LARE, improving fundamentals have helped bolster Latin America’s real estate investment trusts.
“Latin American real estate is in expansion mode due to favorable demographics, low valuations and expanding local capital markets – essentially the opposite scenario versus US REITs,” Jamie Anderson of Tierra Funds said in a note.
While there is definitely more risk in emerging market assets, potential investors have the opportunity to generate a much higher dividend yield to cushion short-term volatility typically associated with emerging economies. For instance, Brazil REITs pay 8% to 12% and Mexican REITs pay 7% to 9%.
“Those kinds of yields simply don’t exist in the US,” Anderson said. “We think a core factor behind LARE’s performance is that Latin American real estate is really under-owned by global investors, while at the same time is a favored asset by local institutional investors like pension funds and life insurance companies. This local, stable capital base means that any weakness tends to be bought very quickly since institutions abroad are just as starved for yield as investors in the US and Europe.”
Related: Improving Investment Outlook for Emerging Market ETFs
Country weights include Brazil 42.0%, Mexico 41.2%, Chile 4.3%, Argentina 2.4% and Peru 1.0%. LARE has benefited as Mexico has rebounded since the U.S. elections and Brazil is going through a consolidation period.
LARE may serve as a complement to emerging market exposure or as an alternative to fixed-income positions.
“We see LARE as a perfect complement or even proxy for emerging markets exposure and as a complement to either a fixed income or domestic REIT allocation,” Anderson said. “For a more conservative investor, REITs are a natural addition to a portfolio that focuses on preservation of capital as well as attractive income. While REITs may not double in a year, they do offer rather predictable income streams and under favorable conditions like those of Mexico and Brazil, reasonable asset appreciation as well.”
For more information on the developing economies, visit our emerging markets category.