Last week, the first-ever ETF to track the Andean region of
South America including Chile, Colombia and Peru was launched by
Global X Funds, and it immediately caught my attention.
It's hardly news that the days of political instability are history
in Chile and have been replaced by tales of a thriving economy,
growing companies and a liquid stock market. That said, while the
replacement of violence and civil war with "investability" in
Colombia and Peru is not entirely new, it's still fresh enough that
it may need some getting used to.
So let me help you get your head around what's at stake here.
The Global X FTSE Andean 40 ETF (NYSEArca:AND) tracks the FTSE
Andean 40 Index, which is composed of the 40 largest companies in
Chile, Colombia and Peru. The total expense ratio for the ETF is
What's new here is putting the three pieces of the Andean puzzle
into one security. The three countries already have single-country
ETFs that give investors access, and each returned at least 45
percent last year.
I'll talk about those three ETFs, including one also sponsored
by Global X, that canvasses Colombia. But as far as the country
breakdown for the new Global X Andean ETF, "AND," goes:Chile makes
up 49 percent; Colombia, 29 percent; and Peru, 22 percent. The new
fund is heavily weighted toward basic materials and financials,
with the two sectors making up 50 percent.
Of the 40 stocks in the fund, the top 10 holdings make up 52
percent. The top holding is a well-known copper company based in
Peru, Southern Copper (
) at 9 percent, followed by Minas Buenaventura (
), a Peruvian mining company with 7 percent of the allocation.
Chile's economy, the fifth-largest in South America, has been
strong and is expected to get even stronger. The Chilean government
anticipated growth of 5.1 percent in 2010, and is forecasting even
more robust growth this year-of 6.1 percent-helped by strong
Chile also benefits from rising demand for copper. The metal is
the country's largest export by value and its price recently
reached a record high.
The iShares MSCI Chile Investable Market ETF (NYSEArca:ECH) is
composed of 35 Chilean stocks with a strong emphasis on utilities,
industrials and materials. The ETF returned investors 45 percent in
2010 and charges an expense ratio of 0.61 percent.
As of Dec. 31, the stocks in the ETF traded with a fairly high
P/E ratio of 26.6, and the first five weeks of 2011 have not been
kind to ECH, as it has fallen over 11 percent. Part of that is
fallout related to unrest in Egypt in other emerging markets.
Colombia, South America's fourth-largest economy, expects growth
of 4.5 percent for 2010 and 2011, even though it has recently
experienced signs of slowing. The other main concern for the
country has been rising inflation, which recently hit a 15-month
high of 3.17 percent, up from 2.57 percent one month earlier.
The Global X InterBolsa FTSE Colombia 20 ETF (NYSEArca:GXG) is a
concentrated ETF that is composed of only 20 stocks that give
investors direct exposure to the country.
About 60 percent of the ETF is invested in the energy and
financial sectors, giving the ETF a higher-risk profile do to its
dependence on a small number of sectors and stocks. The annual
operating expense ratio is 0.86 percent, and the ETF is down 6
percent in 2011 after posting a 50 percent gain in 2010.
Outdueling its peers, Peru is expected to grow by nearly 9
percent for 2010 and another 7 percent in 2011 according to the
country's finance minister. Similar to Chile, the increase can be
attributed to domestic demand and private investment.
Even more concentrated than Global X's Colombia ETF, "GXG," is
iShares' All Peru Capped ETF (NYSEArca:EPU), which is composed of
28 stocks. About 81 percent of the portfolio is in materials and
financials. The ETF had a great year in 2010, gaining 54 percent.
The fund has lagged the developed markets in 2011, but, with a loss
of less than 1 percent, it remains the leader in the Andean region.
The P/E ratio of the stocks in EPU is 20.6, perhaps a bit high but
certainly more attractive than ECH.
It's exciting that investors have so many choices now, barely a
generation after many of those countries were mired in cycles of
violence, political instability and inflation.
That said, it's time to make a decision regarding the best
strategy to play the Andean region. Do you go with the new Andean
ETF, or use one, two or even all three of the individual-country
ETFs that cover the region?
I feel Global X's new ETF is probably the best fit for the
majority of investors. Even though "AND" is heavily weighted in two
sectors, it does offer country diversification and a reasonable
expense ratio. But don't let the fact AND is a new product hold you
back. If you're ready to invest in the Andean region, go for it
with the new ETF.
Matthew D. McCall is editor of The ETF Bulletin and
president of Penn Financial Group LLC, a Ridgewood,
N.J.-based wealth management firm specializing in investment
strategies using ETFs.
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