3 of the Best Latin American ETFs

07/25/2011 7:30 am EST

Focus: GLOBAL

Rudy Martin

Editor, Investing Insight

Exchange traded funds are becoming very popular investment tools, and they're an especially good way to take advantage the most dynamic sectors in Latin America, writes Rudy Martin of Latin Stock Investing.

ETFs are now an integral element in the investment landscape. Like all funds, they offer diversification. But unlike traditional open-end mutual funds, ETFs can be bought and sold throughout the trading day, not just as of their respective prices at 4:00 p.m. Eastern Standard Time, as with open-end funds.

In addition to potential tax benefits not available to other types of funds, ETFs tend to trade at market prices that adhere very close to their individual net asset value. This is in sharp contrast to closed-end funds, whose prices frequently vary widely from their net asset values, thus exposing investors to risks of paying more than a fund’s intrinsic value when making a purchase and/or receiving less than the fund’s true underlying value when they sell.

We recently noted that investors have been favoring income-oriented Latin American stocks. Coupled with our research on Latin American demographic trends, which indicate significant growth in the number of consumers of telecommunications services, we arrive at our first recommendation…

SPDR S&P International Telecommunications Sector ETF (IST)
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the S&P Developed Ex-US BMI Telecommunication Services Sector Index, a gauge that tracks the telecommunications sector of developed global markets outside the United States.

The fund’s second largest holding, Spain-domiciled Telefonica SA (TEF), a member of our coverage list, makes up 13.6% of the ETF’s portfolio.

Global X FTSE Colombia 20 ETF (GXG)
This ETF endeavors to match the price and dividend performance of the FTSE Colombia 20 Index, a market capitalization-weighted gauge of the 20 most liquid stocks in the Colombian market.

Financials, with a 38.7% representation, make up the biggest slice of its portfolio. The energy sector represents 22.9% of GXG’s portfolio, followed by utilities at 14.6%, utilities at 14.5%, and materials at 10% of the fund’s investments. Investor expenses amount to 0.78% of the fund’s assets of $196 million.

WisdomTree Dreyfus Brazilian Real Fund (BZF)
This fund aspires to achieve total returns reflective of both money-market rates in Brazil available to foreign investors, and changes in value of the Brazilian real relative to the US dollar.

The Fund seeks to achieve its objective by investing in high-quality United States money-market securities and entering into similar size forward currency contracts or swaps, which provide exposure economically similar to an investment in Brazilian money-market instruments. The expense ratio of the $452 million ETF currently stands at 0.45% annually.

This has proved to be a winning strategy for BZF. While the United States has essentially ignored rising consumer prices and, instead, has kept short-term interest rates near zero and placed a lid on longer rates with the Fed’s two “quantitative easing” programs, Brazil has resisted economic overheating by firming its rates.

Business has been humming in the Latin American nation, while the weak recovery in the US economy has raised speculation of a double-dip recession. The result has been a rise of 5.7% in the value of the Brazilian Real relative to the greenback.

That, coupled with the higher money market returns in Brazil versus the anemic returns available in the United States, has provided a double-barreled boost to BZF. The volatile fund rewarded its holders with a total return of 10.4% for the first half of 2011, and 34.8% over the last 12 months.

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