ETF Of The Week: Buying LatAm On The Dip

November 08, 2019

On Halloween, the iShares Latin America 40 ETF, a highly concentrated fund tracking Latin America equities, saw a record $301 million influx of cash, its highest-ever one-day inflow.

As a result, ILF had the highest weekly asset growth of all ETFs, with assets under management in the fund swelling 19%:


Source: ETF.com; data as of Nov. 7, 2019

 

It's likely that ILF's infusion of cash represents someone (or multiple someones) buying on the dip, on the conviction that prospects for Latin America economies will soon improve.

How long that might take is anybody's guess, however.

Economic & Political Unrest In LatAm

Latin America, which spans a vast region of the world from Mexico to Chile, has seen an uptick in political unrest in 2019, with protests in Brazil, Ecuador, Bolivia, Peru, Honduras and more.

Even Chile, which has traditionally been fairly calm and prosperous, has erupted in widespread, sometimes violent demonstrations in recent weeks as its citizens protest stagnating wages, rising costs of living, spiraling wealth inequality and mass corruption.

All this unrest has taken its toll on Latin America economies, which were already in a protracted slump. After benefiting tremendously from the commodity boom at the beginning of the decade, Latin America countries like Brazil and Peru have seen demand for their raw goods dry up more recently, leading to flat or negative growth in their economies.

Although some countries, like Brazil, have seen short-term market gains due to China shifting its agricultural supply chain away from the U.S., a long-term global slowdown—as appears increasingly likely—would mean further bad news for economies in this region.

Mexico Buoys ILF

The two bright spots in Latin America are Mexico and Colombia, which have managed to hold on to gains in recent months. (Brazil, too, has performed well, but with much more volatility.)

Of the 23 Latin America ETFs on the market, the Global X MSCI Colombia ETF (GXG) is the best performer over the past three months (excepting leveraged/inverse funds), rising 15%; it's followed closely by the iShares MSCI Mexico ETF (EWW), which has risen 14%.

ILF takes advantage of that relative success with a substantial (22%) allocation to Mexico equities; it also has 2% in Colombia stocks. The relative resilience of these two countries' markets has helped balance out the more uneven performance from Brazilian equities, which account for 63% of ILF's portfolio.

Highly Concentrated Portfolio

Over the past three months, ILF has risen 9%, making it the best-performing broad-basket Latin America ETF (although several single-country ETFs have outpaced it).

However, the fund still underperforms broader emerging market ETFs, such as the iShares MSCI Emerging Markets ETF (EEM), which has risen 12% over the same period.


Source: StockCharts.com; data as of Nov. 7, 2019

 

Something investors should keep in mind about ILF is that, with only 44 holdings, it is an extremely concentrated, top heavy fund. Its top holding is Itau Unibanco Holding S.A., at 10% of the portfolio. Those looking for a broader cross section of sectors and countries in Latin America probably ought to look elsewhere.

Contact Lara Crigger at [email protected]

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