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Run, Don't Walk To This Latin America ETF

September 28, 2016 3:25 pm
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The Tierra XP Latin America Real Estate ETF (NYSE: LARE) has been highlighted a couple of times in this space recently and with good reason. LARE is either the best-performing real estate exchange-traded fund you've never heard of, the best-performing Latin America ETF you've never heard of, or both. 

Lovely LARE

LARE is up more than 23 percent year-to-date, more than double the returns offered by the largest U.S.-focused ETF holding real estate investment trusts (REITs). Remember, it has been the Federal Reserve's lower for longer interest rate policy that is acting as a primary catalyst behind the rise of REIT stocks and ETFs this year.

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Sure, real estate stocks and ETFs are getting increased attention ahead of the move, happening at the end of this month, that will see the group depart the financial services sector and become the 11th GICS sector. However, that is a phenomenon many market participants are looking at through a U.S. lens. Of course, resurgent Brazilian equity markets are helping, but much of that is attributable to rebounding commodities prices and regime change.

So, if one applies the interest rate logic used on U.S. REIT ETFs to LARE, the Latin America real estate ETF becomes all the more compelling. The reason being is that Brazil is, finally, poised to start lowering interest rates.

Brazilian Influence

Brazil, Latin America's largest economy, is home to some of the world's highest borrowing costs at 14.25 percent. That implies plenty of room for rate cutting and that is good news for LARE, which allocates 52 percent of its weight to Brazilian real estate stocks.

The idea of Brazil's selic rate falling is not fanciful, particularly if inflation data cooperates. Good news for LARE: Brazilian inflation data is doing just that. In fact, for the first time in seven years, Brazil's inflation rate is set to meet the central's bank target, potentially setting the stage for a rate cut that could lift LARE.

“Yields on Brazil's interest rate futures indicate a probability of 78 percent that the bank will cut rates by 25 basis points at its Oct. 18–19 meeting,” according to Reuters.

Additional rate cuts could follow as Brazil's economy is expected to modestly expand next year after contracting this year.

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