Argentina Default Dents Related ETFs

July 31, 2014

Terrible news for domestic economy, but European ETF investors emerge unscathed.

Argentina on Tuesday defaulted on its debt for the second time in 13 years, and ETF investors exposed to Argentine equities were faced with losses following the news. But that downward pressure could prove short-lived if the default leads to political reform in that country.

Up to now, ETF investors had mostly emerged unscathed, with healthy year-to-date returns from Argentine-focused and frontier market ETFs. But the latest twist in Argentina's debt woes came last night, when courts in the U.S. were wrangling over a technicality that left Argentina in default for the second time since 2001, as it was unable to fully repay so-called holdout hedge fund investors in full.

Jasper Lawler, market analyst from CMC Markets, argues, like many analysts and economists have, that while the default is bad news for the Argentine people, it's likely a “nonevent” for financial markets. But today, there was no question that investors were perceiving the default as yet another sign of significant political risk in the embattled country.

The only U.S.-listed Argentina equity ETF, the Global X FTSE Argentina 20 ETF (ARGT | C-23), was down 4.5 percent following last night's default. The slide put the 18 percent year-to-date rally dead on its tracks. But if Lawler is right, that downward momentum shouldn't linger.

The $33.5 million fund, which invests in 20 Argentine-linked ADRs (American depository receipts) listed in the U.S. and weighted by market cap, has actually been attracting assets this year despite concerns about Argentina's solvency. Investors have now poured a net of $25 million into ARGT since the beginning of the year, according to our data.

The broader frontier markets fund, the iShares MSCI Frontier 100 ETF (FM | D-75), had also been rallying and raking in fresh assets this year, but found itself trading about 1 percent lower Thursday following the default news.

Argentina represents 7.7 percent of the overall portfolio—FM’s fifth-largest country allocation. FM has attracted more than $238 million in net new assets so far this year, helping push total assets above $751 million.

The chart below shows year-to-date performance prior to last night's default.

Argentina_ETF_YTD_Perf

Chart courtesy of StockCharts.com

 

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