Finding ETF Ways to Participate in Venezuela's Upside
Name the top-performing global stock market thus far in 2012. Believe it or not, a guess other than Venezuela would be wrong. The country that has been ruled by leftist President Hugo Chavez since early 1999 is home to a stunning stock market rally.
Despite Chavez's penchant for socialist policies, Venezuelan equities have more than tripled year-to-date. All that despite the fact that Chavez likes to nationalize industries or seize assets of foreign companies operating in his country. He has done so 1,000 times since taking office, according to Bloomberg.
To foreign investors, Venezuela is arguably known for two things: High risk of asset seizure and oil. The country, an OPEC member, is Latin America's largest producer of crude. Given Venezuela's status as one of the world's top oil producers and the fact that plenty of foreign oil majors operate there, some might think accessing Venezuelan equities via an ETF is possible. After all, even politically volatile Argentina has an ETF, that being the Global X FTSE Argentina 20 ETF (NYSE: ARGT).
Alas, there as ETFdb's country exposure tool highlights, there are no ETFs currently offering equity exposure to Venezuela. That means investors must turn to bond funds to dance with Chavez.
There is risk with Venezuelan bonds, too. Barclay's estimates that Venezuela's budget deficit could hit nearly a fifth of the its economic output in 2012, Bloomberg reported. When Chavez won re-election last week, Venezuelan sovereign debt fell by the most in four years.
Analysts are mixed in their assessments of Venezuelan debt. JPMorgan upped its rating on Venezuelan debt to Overweight just days after Chavez was re-elected. HSBC said any sell-off in Venezuelan bonds could be "short and limited."
On the other hand, the country is home to rampant inflation (28 percent this year) and Moody's Investors Service says the fiscal deficit could reach 7.7 percent GDP this year.
For those willing to take the risk on continued ebullience toward Venezuelan debt and equities, there are a few ETFs with which to accommodate that desire.
Arrow Dow Jones Global Yield ETF (NYSE: GYLD)
The Arrow Dow Jones Global Yield ETF debuted in May and has managed to rake in $21.4 million in assets under management in that time. GYLD, which has a 30-day SEC yield of 6.11 percent, is a mix of alternative assets, global stocks, international REITs and international corporate and sovereign debt.
No single holding receives a weight of more than 0.68 percent in the ETF and it is worth noting that at the country level, the U.S. represents 41.3 percent of the ETF's weight. The allocation to Venezuela is 3.3 percent.
Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO)
BONO, the ETF not the singer, is a curious case. Up 7.7 percent year-to-date and offering exposure to countries primed for higher credit ratings, the fund has just $7.7 million in AUM.
Investors are missing out on a lineup that is two-thirds investment-grade, a 5.34 percent 30-day SEC yield and a monthly dividend. BONO features an almost 11 percent weight to Venezuela and a dollar-denominated Venezuelan debt issue is the ETF's tenth-largest holding.
Market Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM)
The newly minted Market Vectors Emerging Markets High Yield Bond ETF is off to a decent start with almost $21 million in AUM since its May debut. A decent AUM total and a 4.4 percent gain since debut indicate investors do have a taste for non-U.S. high-yield debt. HYEM is not shy about its Venezuelan exposure. Venezuela is the second-largest country exposure in HYEM at nearly 8.3 percent. A dollar-denominated B+-rated issue from Petroleos de Venezuela, the country's state-run oil firm, is HYEM's fourth-largest holding. Interestingly, Venezuelan issues are more prominent among the top-10 of HYEM's index than the ETF itself.
Other ETFs to consider for Venezuelan debt exposure: WisdomTree Emerging Markets Corporate Bond Fund (NASDAQ: EMCB) with a weight of 2.46 percent. The iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB) features a 4.7 percent weight to Venezuela while the SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (NYSE: EMCD) features two Venezuelan issues among its top-10 holdings.
For more on Latin American bond ETFs, click here.
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