Summer officially arrived on June 20 at 7:09 PM Eastern Daylight Time.
A couple of days later, the sun went down on some of the world’s biggest banks as Moody’s cut the credit ratings of JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and many more. It’s going to be a difficult few months for Jamie Dimon and the rest of his banking cronies.
Therefore, when one of my editors asked me to write about the SPDR to watch this summer, the obvious choices were either the SPDR S&P Bank ETF (NYSE:KBE) or the Financial Select Sector SPDR (NYSE:XLF). However, I want something that has a chance of gaining ground, so I’ll go down south to Latin America and the SPDR S&P Emerging Latin America ETF (NYSE:GML). Good things are happening in that part of the world.
My selection will likely irritate the powers that be because in terms of volume and assets, this SPDR is a tiny speck on the radar. With average daily volume of 15,000 shares and $117 million in assets, the XLF is 50 times larger than the GML in terms of assets, and its daily volume 30 times greater.
Not to worry — what the GML loses in size, it makes up for in performance. Its annualized three-year return is 30.7%, 841 basis points higher, and if you’ve owned the XLF for five years, you really don’t want to know the difference — it’s that painful.
It’s little consolation for financials that the XLF’s recent performance has been much better. Long-term, however, demographics make the GML a much better investment.
Why do I like Latin America so much? Because it’s starting to make some real noise on the economic front. In the past it has always shown promise but never quite lived up to expectations. Now, though, Raul A. Garcia, an associate principal at Miami-based accounting firm Kaufman, Rossin & Co. who writes about business in Latin America, believes the stars are finally aligning despite nagging political and social problems.
A good example is Starbucks‘ (NASDAQ:SBUX) announcement on June 19 of its Latin American expansion plans, which include several hundred new stores in Brazil, 300 stores in Argentina and Mexico by 2015 and new stores in Costa Rica.
According to a report in The Miami Herald, only one country in Latin America and the Caribbean — Paraguay — is expected to see negative economic growth in 2012. Brazil is projected to grow by 2.7%, Mexico by 4.0% and Chile by 4.9%. You won’t find that kind of growth around here.
Brazil has the largest representation in the GML, at 56%, followed by Mexico at 24% and Chile at 10%. Several stocks jump out at me from its top 10 holdings.
The first is Vale (NYSE:VALE), the second-largest metals and mining company in the world. Part of the rise in Latin America’s economic power has come from China’s thirst for natural resources. In 2011, 32.4% of Vale’s revenues came from China. A Chinese slowdown is a concern, but since VALE has a weighting of only 8% in the GML, this ETF should be O.K. regardless.
Next up, I really like Femsa (NYSE:FMX), the Mexican conglomerate that owns 20% of the Heineken Group, 63% of Coca-Cola Femsa (NYSE:KOF) and 100% of Oxxo convenience stores. Femsa is a major player in the Mexican beverage industry. I’m sure this is just one of the reasons Bill Gates owns almost 8% of its stock.
Lastly, Wal-Mart de Mexico represents 2% of the fund. Majority-owned by Wal-Mart (NYSE:WMT), it’s currently embroiled in a bribery scandal that has forced Wal-Mart to investigate its operations in other emerging markets. While this is troubling news, Wal-Mart will take care of it.
The SPDR S&P Emerging Latin America ETF represents 123 of Latin America’s biggest companies. The weighted average market cap is $47.7 billion, with materials, financials, consumer staples and energy accounting for 70% of the fund’s market value.
It’s an excellent proxy for capturing any future growth in Latin America — and I expect plenty. Now go enjoy a cold cerveza.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.