By Alex Rosen
We rate iShares Latin America 40 ETF (NYSEARCA:ILF) a Hold based on the notion that while Latin America may be made up of predominantly emerging markets, there are plenty of developed markets and solid companies with strong foundations as well. ILF’s largest individual holding is in non-energy mining, and there is no shortage of demand for extraction in Latin America. Chile’s entire economy is predicated on the extraction of copper, and they are on fairly solid ground.
The ETF offers exposure to Latin America’s top 40 equities. Currently, the fund is holding 42 individual stocks, which suggests that either it’s due for a rebalance, or there was a tie at the bottom. The stocks are hand-picked by an index committee from blue-chip companies predominantly trading in Brazil, Chile, Colombia, Mexico, and Peru, though it does also have holdings in the U.S. currently.
Proprietary ETF Grades
Segment: Emerging Markets
Sub-Segment: Latin America blue-chip stocks
Correlation (vs. S&P 500): Moderate
Expected Volatility (vs. S&P 500): Low
ILF is a very top-heavy fund, with almost 60% of the assets in the top 10 holdings, and 15% dedicated to just one asset, Vale S.A. (VALE). From a sector standpoint, the three largest sectors, finance, non-energy mining, and energy mining make up 60% of the fund as well. The fund’s holding strategy is not complicated: take the 40 biggest companies in Latin America and follow them. Rebalance by committee quarterly and let it run.
Latin America is fairly quiet. No one is threatening to invade another country, no one is screaming for regime change, at least not loudly, and even Venezuela, the rogue state of Latin America, has seemingly resided itself to a non-functioning kleptocracy. Of course, the same historical issues that have plagued the region exist, but compared to other parts of the world, it seems pretty tranquil.
As the world transitions more and more to a purely digital age, many of the base elements needed to foster that technology are found in Latin America. Countries like Bolivia, Chile, and Brazil all possess unique assets that the world is clamoring for and are willing to support stability in order to be able to extract. Even Venezuela, the bad boy of the region, still has plenty of oil to export and even extract from its untapped reserves.
Right now, the biggest concern in Latin America is whether Argentina can recover from its shocking upset against Saudi Arabia in the first round of the world cup.
Latin America is an extremely resource-rich region, with those resources spanning multiple sectors. However, as the joke goes, Brazil is the eternal next big thing. Investors have been waiting for decades to see Brazil graduate from emerging to emerged market, and yet here we wait. Argentina, by contrast, has the distinction of being the only country to devolve from developed to developing market. Even Chile, long held as the model of growth and stability in the region, has seen its fair share of problems lately.
Latin America has struggled to industrialize and move beyond a base manufacturing and extraction region. This inability to grow for multiple reasons (for an interesting take on this, read about the Washington Consensus and its long-term effects on Latin America) has made Latin America a slave to market whims and exogenous demands. Perhaps it is a long-lasting response to Import Substitution Industrialization (ISI), but whatever the reason, Latin American industrialization has not seen the levels of growth economists had predicted.
Emerging market wonks have been touting the potential of Latin America for decades, and with good reason. The future is there, it just hasn’t been seized yet. Perhaps now that the global elites are focused on other more sexy issues, Latin America will have the chance to sort itself out free from foreign interference and will finally take that next step.
One of the biggest issues in Latin America is the wealth distribution inequality. If you have it, it’s a great time to live in the region. If you don’t, it’s a rough go. Fortunately, ILF focuses on the haves, and as such has shown itself to be a solid investment, outperforming the S&P by nearly 20% YTD.
ILF’s heavy dependence on mining and finances leaves it vulnerable to things beyond its control. The demands for minerals and energy are completely dependent on what happens in regions outside of Latin America. The finance sector is supported by money from abroad as well. These are beyond the control of the region, and Latin America does not have the capacity to weather these demand-side fluctuations internally. As a result, ILF does not exist in a bubble. The fund may only invest in Latin America, but it still participates in the larger global economy and is very susceptible to what happens outside its borders.
Proprietary Technical Ratings
- Short-Term Rating (next 3 months): Hold
- Long-Term Rating (next 12 months): Hold
ETF Quality Opinion
ILF is a plain vanilla ETF that does what it says it does, and that’s good. The overweighting in sectors and individual holdings is a bit worrisome and something that will need to be monitored closely moving forward, but for now, it skews toward high-demand sectors, so it should respond accordingly.
ETF Investment Opinion
We value ILF a hold, because it focuses on the wealthy in a region where the rich continue to get richer. We state this with the caveat that at a moment’s notice, the winds could shift and the demand could collapse, but right now, it looks like a solid place to invest, especially if you are looking for emerging market exposure and want to avoid Asia.