The stock market can be highly contentious, but we can all agree on the dreadful performance of Latin American equities and exchange-traded funds this year.
The iShares Latin America 40 ETF (ILF) — heavily allocated to Brazil, Mexico and smaller Latin American economies — is off nearly 20% year-to-date, just shy of triple the 7.6% lost by the MSCI Emerging Markets Index.
Of the 34 ETFs throwing off 52-week lows Thursday, six were Latin American funds.
While each single-country ETF tracking the various Latin America economies has its issues, there is a unifying theme: slumping commodities prices.
Latin American ETFs to Avoid: iShares MSCI Brazil Capped ETF (EWZ)
Proper treatment of Latin America’s single-country ETFs should start with the iShares MSCI Brazil Capped ETF (EWZ). EWZ is the most comprehensive ETF tracking Latin America’s largest economy — Brazil — but this is an example of size not meaning much, except for the sheer amount of crappy Brazilian stocks EWZ holds. Thanks in large part to Brazil, EWZ isn’t just at 52-week lows; as a result of its 28% decline year-to-date, EWZ now sits at roughly decade-long lows
Brazil is a major producer of several commodities. It is Latin America’s second-largest oil producer behind OPEC member Venezuela. Brazil is also the largest coffee grower in the world and the biggest producer of iron ore.
But look at the performances of the iPath Bloomberg Coffee Total Return Sub-Index ETN (JO), Petrobras (PBR) and Vale (VALE), and you’ll understand why the EWZ ETF tumbled so ferociously this year. Various Petrobras and Vale securities combine for almost 12% of EWZ’s weight. On top of that, the stronger dollar has been killing Brazil.
Emerging-market currencies have been whooped hard this year, and the Brazilian real is one of the worst. The WisdomTree Brazilian Real ETF (BZF) is off roughly 18% this year, despite the central bank of Brazil consistently raising interest rates. At the end of July, Brazil’s central bank raised interest rates to a jaw-dropping 14.25%, but rate hikes have done nothing to support the real.
The bottom line is that flirting dangerously with losing its investment-grade credit rating — news that doesn’t exactly foster confidence in the countries debt or equities.
For the privilege of dealing with the volatile EWZ (the ETF’s standard deviation is 27.2%), investors pay 0.62% per year, or $62 per $10,000 invested.
Latin American ETFs to Avoid: iShares MSCI Mexico Capped ETF (EWW)
The iShares MSCI Mexico Capped ETF (EWW) looks better than it is when compared to the EWZ ETF.
The lone Mexico ETF is down “just” 8% this year, and while that isn’t as horrendous a showing as some of the other Latin American ETFs, EWW’s lethargy is nonetheless disappointing. Mainly because investors often believe Mexican stocks are correlated to U.S. stocks, yet the S&P 500 is up a bit more than a percent this year.
EWW is something of paradox in that it has no exposure to the energy sector, and materials stocks are merely EWW’s third-largest sector weight. Still, EWW’s’ price action is reflective of Mexico’s status as a major non-OPEC oil producer and one of the largest silver producers in the world.
But Mexico shares one character flaw with Brazil — a crumbling currency, as Mexico’s peso resides near all-time lows against the dollar.
For that lovely experience, EWW charges 0.48% per year, or $48 per $10,000 invested.
Latin American ETFs to Avoid: iShares MSCI Chile Capped ETF (ECH)
Seasoned investors have likely heard the euphemism “Dr. Copper.” Copper is viewed as an accurate gauge of global economic health because of the red metal’s various industrial applications.
Well, the prescription Dr. Copper has been writing has not been a pleasant one.
The iPath Bloomberg Copper Subindex Total Return ETN (JJC), which tracks copper futures, has plunged 18.6% this year, dragging the iShares MSCI Chile Capped ETF (ECH) down 13% in the process. Again, this is an easy scenario to explain: Chile is the world’s largest copper-producing country.
ECH, like the aforementioned Mexico ETF, is not excessively weighted to commodities-related sectors. In fact, the only dedicated ETF for stocks in the world’s largest copper-producing nation allocates less than 13% of its weight to the materials sector. Utilities and financial services stocks both account for significantly more of ECH’s weight than do materials names.
Still, copper production accounts for about two-thirds of Chile’s government receipts making ECH a tough bet at a time when commodities prices are slumping. If there is a silver (not copper) lining here, it is that Chilean stocks are inexpensive relative to their Brazilian counterparts.
If you’re feeling froggy on Latin America ETFs, ECH charges 0.62% per year, or $62 per $10,000 invested.
As of this writing, Todd Shriber did not own any of the aforementioned securities.