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You'll Never Guess What The Best LatAm ETF Is

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When it comes to single-country, large-cap focused ETFs offering exposure to Latin American nations, there are six somewhat large funds:

  • The iShares MSCI Brazil Capped ETF (NYSE: EWZ)
  • iShares MSCI Chile Capped ETF (NYSE: ECH)
  • iShares MSCI All Peru Capped ETF (NYSE: EPU)
  • iShares MSCI Mexico Capped ETF (NYSE: EWW)
  • Global X FTSE Colombia 20 ETF (NYSE: GXG)
  • Global X FTSE Argentina 20 ETF (NYSE: ARGT)

Chances are most investors would not be able to guess which one of those ETFs has been the best performer this year. Hint: It is the only one of the group that is up year-to-date. Hint: It is the one that many investors would least expect.

Brazil's long list of woes ensure EWZ is not the answer. Falling industrial and precious metals prices do the same for ECH and EPU. Long story short, the Global X FTSE Argentina ETF is the best performing single-country Latin America ETF this year.

In the past month alone, ARGT has surged 14.4 percent and that run comes after the ETF was reverse split 1-for-3 in May.

ARGT's new found upside represents a stunning reversal of fortune from 2012 when the ETF was hammered on fears the South American nation was flirting with its second sovereign debt default this century. Argentina's anti-free market government and the possibility of a second sovereign default are among the reasons index providers MSCI (NYSE: MSCI) and FTSE have previously warned the country could lose its frontier market status and be relegated to "stand alone."

Related: Argentina's Rally May be Short-Lived.

Although ARGT has jumped 6.5 percent this year as the aforementioned LatAm ETFs have all traded lower, the overhang of a bond default is not gone. The country is viewed as the least creditworthy borrower in the developing world and has the highest probability of default among emerging nations.

Last year, a U.S. appeals court ruled Argentina cannot make payments on its overseas debt until it pays holdout investors from its previous default. Those investors include U.S. hedge fund Elliott Management. Last month, amid opposition from the U.S., the International Monetary Fund scrapped a proposal to support Argentina in the bond fight.

Citigroup estimates by the end of 2015, the central bank's net reserves, which exclude dollar deposits, could fall to $12.5 billion and cover just two months of import demand and Citi says the likelihood Argentina will restructure the 2015 bonds is now 37.5 percent, according to Bloomberg.

Still, there is hope for regime change in Argentina, a catalyst that could buoy ARGT's fortunes going forward. Yields on the country's 15-year sovereign bonds were spotted around 9.45 percent earlier this week (those yields had previously flirted with 12 percent in the past year) following local elections.

Those elections showed voters' patience with President Cristina Kirchner's ruling party have worn thin. That party's candidates drew barely more than 26 percent of the vote, but voters have to wait another two years before getting a chance to oust Kirchner.

Aside from the bond flap and local politics, investors need to keep an eye on oil services firm Tenaris (NYSE: TS), e-commerce firm Mercadolibre (NASDAQ: MELI) and McDonald's franchisor Arcos Dorados (NYSE: ARCO) as those stocks combine for 48.4 percent of ARGT's weight.

For more on ETFs, click here.

Posted-In: Long Ideas News Bonds Short Ideas Emerging Markets Hedge Funds Emerging Market ETFs Politics Best of Benzinga

 

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