Market Overview

Behind The LatAm ETF Resurgence

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Behind The LatAm ETF Resurgence

After being drags on diversified emerging markets indexes and exchange-traded funds for several years, Latin American equities are leading this year's emerging markets resurgence. For example, several of this year's best-performing single-country ETFs are Latin America funds, a group that includes the Global X MSCI Argentina ETF (Global X Funds (NYSE: ARGT)) and the Global X MSCI Colombia ETF (NYSE: GXG).

LatAm,Much More Than Just Brazil And Mexico

The oft-overlooked Global X FTSE Andean 40 ETF (Global X Funds (NYSE: AND)) is up an impressive 29.4 percent year-to-date. AND is the only multi-country Latin America ETF that excludes the region's economic heavyweights, Brazil and Mexico, opting to focus on Chile, Colombia and Peru.

Related Link: Another Catalyst For EM Bond ETFs

While Brazil, as the region's largest economy, commands most of the headlines, the real star among Latin American equity markets this year has been Peru. Peru accounts for 18.3 percent of AND's weight, which is well above the commodities-rich country's weight in the MSCI Emerging Markets Index and regional Latin America ETFs.

Where Are The Returns Coming From?

“An important driver for this year’s returns in South America is a reversion to the mean, as abnormally low valuations for South American equities have begun to normalize. Economic growth among these regional powerhouses had deteriorated since 2011, with high-flying GDP growth falling from over 5 percent per year to a recession in 2015 with growth below -1 percent,” according to Global X research.

Bullishness for Colombian stocks and GXG is largely attributable to rebounding commodities prices, but another catalyst could boost equities in South America's second-largest economy. Colombia's government and the guerrilla rebels of the Revolutionary Armed Forces of Colombia (FARC) have reached an agreement to end a war that has spanned more than five decades.

A Case For GXG

Although it has struggled along with other emerging market single-country ETFs in recent years, GXG tripled in its first two years of trading as the Uribe and Santos administrations made bolstering Colombia's domestic security cornerstones of their agendas.

When emerging markets were surging, Colombia's efforts to improve its domestic security proved fruitful, as the country saw increased foreign investment and higher sovereign credit ratings from the major ratings agencies.

Colombia, South America's second-largest economy, is nearly 32 percent of AND's weight.

“A second important contributor to the turnaround in these countries has been this year’s rebound in commodity prices. The end of the commodities ‘super cycle’ was the leading cause of the initial selloff, and therefore the rebound in key commodities exported by each of these countries has undoubtedly helped their economies, currencies, and markets regain strength,” added Global X.

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