Currently, Brazil dominates the economy of South America,
comprising about half of the entire continent’s GDP from a PPP
perspective. In total, Brazil’s GDP is about $2 trillion of the
nearly $4 trillion South American economy, far outpacing the second
place nation, Argentina and its $700 billion. As a result, many
investors focus in on the country for exposure to the region, as
the massive nation has a huge market, is growing quickly, and is a
member of the increasingly important BRIC bloc.
Yet beyond this giant, investors still have a number of solid
options which could also offer quality exposure to the growing
economic region. While some look towards Argentina, the country
remains riddled with inflation and a poor history, making it
inappropriate for many looking for some semblance of stability in
the space (read Is ARGT A Better Latin America ETF Pick?). As a
result, investors must look to smaller markets, chief among them
are the Andean trio of Colombia, Peru, and Chile. While
individually all three are not very big economies, together they
combine to make a nearly trillion dollar economy (PPP).
Additionally, these three are also growing quite quickly—all
have higher GDP growth than Brazil—and are seeing less in inflation
their Portuguese speaking counterpart. Thanks to these factors, as
well as strong commodity supplies and relatively stable political
situations, they could be ideal for investors seeking to make
allocations to the region besides in the behemoth of Brazil (see
Brazil Small-Cap ETF Showdown).
However, individual stock allocations to the region are still
difficult, as most securities in the area still trade only on local
exchanges. As a result, investors should look to a series of ETFs
that target the space which can offer up some of the only exposure
that U.S. investors have at their disposal, at least at this time.
Below, we take a look at some of the top ways to play this region
with ETFs and the key differences between the main funds in the
space:
Colombia ETFs
Colombia could be an interesting choice for investors thanks to
its production of in-demand commodities, strong fiscal position,
and close U.S. ties. Growth is also high in the nation, and the
country has begun to slowly diversify its economy out of primary
sectors, which could help to keep the economy surging ahead for
years to come. However, there are some security issues still in the
country, and some instability in neighbors could pose a concern for
Colombia going forward (read Five Cheaper ETFs You Probably
Overlooked).
Currently, investors have two options in the space, the
Global X FTSE Colombia 20 ETF
(GXG) and the
Market Vectors Colombia ETF
(COLX). While the two
are similar, there are some key differences between the funds.
First, GXG has far more in assets and trading volume, but the fund
does charge six basis points a year more in fees. Also, COLX has
more securities in its basket and is less heavily concentrated in
its top holdings, although both have a heavy dependence on
financials and energy firms.
Peru ETF
Another surging South American economy is in the mountainous
nation of Peru. The country has a relatively high growth rate
compared to many of its peers in the region, low debt, and growing
integration with major world economies via free trade agreements.
Additionally, the country is a major producer of silver, which
given recent trends in the precious metal market, could act as a
driver of total exports going forward. However, Peru still does
have some issues, as the country does have a very high poverty rate
and unemployment outside of the cities is rampant, a situation that
could eventually drag down total growth rates (read Top Three
Emerging Market Consumer ETFs).
To play the Peruvian economy, investors have the iShares
MSCI All Peru Capped ETF
(EPU) at their disposal.
The fund uses a sampling technique to achieve its goal, investing
in about 27 securities while charging 59 basis points a year in
fees. Exposure is heavily concentrated in the basic materials
sector (56% of the total), while financials also receive a sizable
chunk at just over one-fifth of total assets. In these two sectors,
the industry breakdown favors metals & mining, precious metals,
and then broad banking.
Chile ETF
Chile is another quality choice for investors seeking exposure
to Latin America, and it could also be one of the more developed
choices as well. The country has a relatively high GDP per capita
that beats all other nations except for neighboring Argentina.
Beyond this, the country is now known for low levels of corruption,
high levels of economic freedom and competitiveness, and its vast
mineral wealth. Chile is a major producer of base metals like
copper and it is increasing exports of lithium as well (read Go
Local With Emerging Market Bond ETFs).
For investors seeking an investment in this increasingly
important economy, the iShares MSCI Chile Index Fund
(ECH) looks to be the
top choice. The product tracks the MSCI Chile Investable Market
Index which looks to hold about 40 securities in its basket and
charge investors 59 basis points a year in fees. Utilities take the
top spot in the fund at about 22% of the assets, while basic
materials (18%), industrials (18%), and financials (16%) round out
the top four.
Broad Andean ETF
Additionally, investors should note that there is a broad way to
play all three of these nations in a single ticker with the
Global X FTSE Andean 40 ETF
(AND). This product
looks to follow the FTSE Andean 40 Index, giving investors access
to the 40 biggest stocks that trade in any of the three Andean
nations of Chile, Peru, and Colombia. The ETF does charge investors
a rather steep 72 basis points a year in fees and also sees light
volume of just 3,700 shares a day. However, it remains the only way
to target exposure to the three countries by themselves without
other nations being involved (read Three Overlooked Emerging Market
ETFs).
From a holdings perspective, two Colombian firms take the top
spots as Ecopetrol
(EC) and
BanColombia
(CIB) combine to make up
about 18% of the total. Beyond this, Chilean firms comprise the
most from a single country at about 40% while Colombia is second,
and Peruvian firms are third. In terms of sector allocations, 75%
of the fund is devoted to four sectors; basic materials and
financials each make up about 25% of the fund while energy (15%)
and utilities (11%) round out the next quarter of the total
exposure profile.
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