Market Overview

You Can Ditch Brazil But Keep Latin America With This New ETF

You Can Ditch Brazil But Keep Latin America With This New ETF

Brazil is Latin America's largest economy. As such, it usually commands the most attention among investors evaluating the region's opportunities. Even supposedly diverse Latin America regional exchange traded funds are heavily allocated to Brazil.

A ETF takes a unique approach, offering exposure to Latin American equities while excluding Brazil.

What Happened

The Xtrackers MSCI Latin America Pacific Alliance ETF (NYSE:PACA) debuted earlier this week. PACA, the latest ETF from Deutsche Bank's DWS unit, tracks the MSCI Latin America Pacific Alliance Capped Index and features no exposure to Brazilian stocks.

The new ETF allocates nearly 48 percent of its weight to Mexican stocks. Mexico is Latin America's second-largest economy behind Brazil. PACA devotes nearly 38 percent of its combined weight to Chilean and Colombian equities. At a weight of 12.5 percent, Peru is the only other country exposure of note in the new fund.

Why It's Important

PACA comes to market at a time when Brazilian stocks are rallying. ETFs tracking that market soared in anticipation of market-friendly reform candidate Jair Bolsonaro emerging victorious in the country's presidential election, which he did.

Year-to-date, the largest U.S.-listed Brazil fund is slightly higher while equivalent funds tracking Mexico, Chile, Colombia and Peru are all saddled with double-digit losses. PACA allocates over 27 percent of its weight to financial services stocks. The consumer staples and materials sectors combine for almost 36 percent of the new fund's weight.

PACA's annual expense ratio is 0.45 percent, or $45 on a $10,000 investment, making it slightly less expensive than the Brazil-heavy iShares Latin America 40 ETF (NYSE: ILF).

What's Next

While PACA doesn't hold Brazilian stocks, more upside there could boost the new ETF as South America's smaller equity markets have often displayed somewhat tight correlations to Brazil. Rebounding commodities prices would also be good news for PACA given the commodities-intensive nature of the fund's geographic exposures, including Chile and Peru.

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