Market Overview

Loving Latin America ETFs

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Loving Latin America ETFs

After a couple of years of dismal showings, Latin America exchange-traded funds are roaring back in 2016. For example, the iShares S&P Latin America 40 Index (ETF) (NYSE: ILF) is higher by nearly 15 percent year-to-date.

At the country level, the iShares MSCI All Peru Capped Index Fund (NYSE: EPU) is one of this year's best-performing single-country ETFs, developed or emerging markets, with a gain of 47.4 percent. EPU is also one of the year's best-performing non-leveraged ETFs of any stripe. EPU and ILF are just two examples underscoring the LatAm ETF resurgence of 2016.

Regional Performance

Perhaps more than other regions of emerging markets, Latin America epitomizes the intersection of potential and peril. As ETFs have made scores of developing economies more accessible to advisers and investors, these users of ETFs have consistently heard about the potential of the Latin American investment thesis.

Related Link: Right After MSCI Snub, A New A-Shares ETF Debuts

They have also heard about the perils, many of which stem from the region being home to several of the most corrupt countries in the world. As Brazil, Latin America's largest economy, is teaching investors, economic heft does insulate a country from corruption. In Latin America, the mix of economic size and corruption can producer dire investor outcomes. See Argentina, Brazil and Venezuela.

Looking Long Term

Some market observers are enthusiastic about Latin America's long-term prospects.

“Consider the region’s young population, expanding middle class, fast adoption of technology and relatively weak market competition — conditions are ripe for change. If Latin America takes more steps to encourage innovation, it could be in the driver’s rather than the passenger’s seat as things change. More inclusive growth—and ultimately stronger economies—could be on the horizon,” said BlackRock in a recent note.

Weighing Risk

Still, making a long-term bet with Latin America ETFs requires some tolerance for risk on investors' parts. ILF, which allocates over 82 percent of its weight to Brazil and Mexico, has a three-year standard deviation of almost 26 percent. By comparison, the same metric on the MSCI Emerging Markets Index is 16.7 percent. Some of the region's single-country ETFs are even more volatile than ILF.

For those willing to stomach the volatility, there are some data points that speak to the Latin America opportunity set.

“From the World Bank’s data, as of the end of 2014, about 50 percent of adults in Latin America didn’t have a bank account. While that is down from 61 percent in 2011, the fact remains that too many people have no access to banking services or financing,” added BlackRock.

 

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