ETF XRAY

Brazil Dominates Latin ETFs

By Carl Delfeld of the Chartwell ETF Advisor

Brazil’s stock exchange, Bovespa, rose 52 % on its first day of trading. The exchange’s R$32-a-share price on Monday represented almost 50 times forward earnings.

This is a head turner in that other listed stock exchanges may be a bit toppy – the Financial Times reports that the London Stock Exchange is at 25 times 2008 earnings, the Singapore Exchange at 30 times – but only Hong Kong’s is at a similar multiple.

Bovespa is the largest bourse in the region, and only two others – the tiny Peruvian and Colombian exchanges – are listed. The owners of Mexico’s stock exchange, about a third the size of the Bovespa, delayed going public this summer because of fears markets were unfavourable. Bad move.

The surprising jump in this IPO is a reflection of this year's strength in Latin ETFs and, in particular, of Brazil's dominance.

The iShares Latin America 40 (ILF) is up 56% so far this year with 64% exposure to Brazil, 26% to Mexico, 7% to Chile and 3% to Argentina. The Brazil iShare ETF (EWZ) is up 76.4% this year, Mexico (EWW) is up 21.9% in part due to its ties to the U.S. economy and fears of a slowdown.

ILF's sector breakdown is 33% for materials - read commodities, 17% financial institutions and 14% for energy followed by the industrial and telcom sector.

Brazil's largest company, Petrobas, has gone in market value from $27 billion five years ago to $173 billion. The largest ten companies listed on the exchange have collectively gone from only $94 billion in 2002 to $685 billion today.

Will these Latin markets and ETFs hold up or are they overvalued and headed for trouble? Join the Chartwell ETF Advisor and get some expert advice.

ETFs for Latin Boom or Bust

By Carl Delfeld of the Chartwell ETF Advisor

Whether you think Brazil, Mexico and Chile will continue to outperform expectations or that a pullback is all but inevitable, there is a ProFunds exchange-traded fund that will allow you to act on your convictions.

The UltraShort Latin America ProFund (UFPIX) provides leveraged exposure to the Bank of New York Latin America 35 ADR Index. The ETF seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Bank of New York Latin America 35 ADR Index.

The Ultra Latin America ProFund (UBPIX) provides leveraged exposure to the Bank of New York Latin America 35 ADR Index. This seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Bank of New York Latin America 35 ADR Index. It is up 2.1% since its launch.

In both cases, the basket of Latin America stocks in the ETFs are ADRs or GDRs that trade on U.S. exchanges. Investors also need to realize that like most Latin American ETFs, 80% or more of your exposure is to the markets of Mexico and Brazil and very little to countries like Chile and Argentina.

Speaking of Argentina, Cristina Fernández de Kirchner seems certain to succeed her husband to win Argentina's presidential election on October 28th.

The Economist rightly points out that Mr. Kirchner has presided over Argentina's vigorous recovery from a horrendous economic, financial and political collapse in 2001-02. Thanks to four years of annual economic growth of over 8%, poverty and unemployment have halved since he took office in 2003.

But what about lately? Perhaps to help cement the election of his wife, he has deliberately allowed the economy to overheat. Interest rates are negative in real terms, while the government has gone on a spending spree with federal spending up by a shocking 48% in nominal terms. Inflationary pressure is rising fast and the government has sought the worst possible remedy: price controls.

Maybe it is a good thing that Argentina is only a small slice of the Latin pie.

Find out the Chartwell ETFs view on Latin American ETFs and the right ones for your global portfolio.

Latin American ETFs Banking on Emerging Middle Class

The stock markets and exchange-traded funds of Latin American countries have been top performers in part because of market reforms that have supported the development of a vibrant middle class. This is important because it provides a strong base for a consumption led economy and is closely tied to education and productivity levels so crucial to sustained economic growth and political stability. Urbanization and the rise of a middle consumer class are the twins that are driving emerging markets.

While citizens in Latin America see steady economic progress, investors in ETFs such as Latin America (ILF), Brazil (EWZ) and Mexico (EWW) have also been rewarded for their faith in the region's ability to avoid the boom and bust trap that have led in the past to volatile and disappointing market performance.

An article in the Economist points out that these changes are most dramatic in Brazil and Mexico, which between them account for more than half of Latin America's 560m people and 88% of the exposure in the iShares S&P Latin America 40 ETF (ILF). The statistics included in this article are very encouraging and I might add have come without spectacular growth. While Latin America as a whole has averaged annual economic growth of just under 5%, the average for emerging markets worldwide has exceeded 7% during the last four years. Ernesto Kritz, a labor economist in Buenos Aires, reckons that around 40% of Argentine families, up from 20% in 2003, have the monthly income of $1,000 that he sees as necessary for a middle-class lifestyle. In both Brazil and Mexico the incomes of the poorest half of the population are growing faster than the average. In Mexico, although growth has been only moderate, poverty has fallen from 37% to 14% over the last ten years.

The quality of homes and public services are improving rapidly: nearly everyone has electricity, piped water and sewerage. And, most importantly the mood of optimism and progress is feeding the cycle of prosperity and growth. Echoing Ronald Reagan's re-election campaign theme, “Each year has been better than the last,” says Mrs Jozina de Arruda. Between the profit from the kiosk and her husband's wages as a security guard at a bank, they earn $900-1,200 a month.

They are members of a new middle class that is emerging almost overnight across Brazil and much of Latin America. Tens of millions of such people are the main beneficiaries of the region's steady and long awaited economic stability and recent economic growth. Having left poverty behind, their prosperity is driving the rapid growth of a mass consumer market and this has profound and positive implications for the region's politics. For a solid middle class means that politicians will be held accountable for maintaining and expanding progress rather than catering to elites and ignoring the plight of the poor striving for their own middle class lifestyle.

By Carl Delfeld of the Chartwell ETF Advisor

Latin American ETFs Gain, China Suffers Negative Flows

Investors continued to reduce their direct exposure to Chinese equities and exchange-traded funds during the first week of June, pulling over $1 billion out of China and Greater China Equity Funds tracked by
EPFR Global for the second week in a row. But they pumped another $810 million into Latin America Equity Funds, adding to their indirect bet on the Chinese economy’s robust growth and its demand for raw materials. ETFs and funds geared to developed markets had a mixed week. Japan ETFs and equity funds extended their losing streak. But US equity funds posted inflows on the strength of an exceptionally good week for Large Cap Growth Funds as interest rate fears took a brief holiday before resuming at mid week, European equity funds were back in the black and global equity funds and ETFs extended their winning streak to 13 straight weeks.

There was a strong suggestion in this week’s data that investors are looking for dips to buy into. Flows and fund performance were, for the most part, inversely correlated. The four equity fund groups that posted the best portfolio performance – Japan, Pacific, EMEA and Asia ex-Japan equity funds – all posted net outflows, while relative laggards such as European, Global and Latin America equity funds attracted fresh money.

At the country level Brazil has been the star in recent weeks. But Mexico Equity Funds took in $149 million during the week ending June 6, handily distancing Brazil Equity Funds in terms of flows as a percentage of assets under management.

Find out more by joining the Chartwell ETF Advisor

Brazil Beats China for Fund and ETF Investment Flows

During the last week in May, investment flows into emerging markets by global equity managers and exchange-traded funds tracked by EPFR Global tilted toward Latin America and in particular Brazil at the expense of China.

The $789 million that investors committed to Latin America funds and ETFs was driven in part by a reassessment of Brazil’s economic prospects following its latest ratings upgrade. That upgrade, allied to falling interest rates and the government’s willingness to at least entertain the idea of rationalizing Brazil’s tax system, point to some positive surprises from the region’s biggest economy during the second half of the year. Brazil equity funds took in $280 million, their best showing in percentage terms since the last week of January, 2006. But investors still expect some negative surprises from the biggest economy in the Asia ex-Japan universe: they pulled another $354 million out of China and Greater China funds as the Chinese government continues its effort to rein in the country’s red hot economy and its booming equity markets.

In addition, EPFR Global reports that year-to-date flows into Emerging Markets bond funds pushed over the $3 billion mark. Global and Pacific Equity, Utilities Sector and High Yield Bond Funds also extended their winning runs as the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index narrowed to a new record low of 153 basis points. But China and Japan Country funds and ETFs remained out of favor, although the pace of outflows slowed somewhat, and funds geared to interest rate sensitive sectors were hit with further redemptions.

By Carl Delfeld of the Chartwell ETF Advisor

Latin America Leading World Markets In '07

TRANG HO of Investor’s Business Daily had some interesting things to say about Latin American. Mr. Ho pointed out that Latin American equities still command the biggest lead among world equities, up 17.62% year to date vs. 14% for the closest competitor, China, according to Lipper.” Mr. Ho also observes that Latin American funds are the only ones among emerging markets to post net inflows, according to EPFR Global, which tracks global fund flows and asset data.

The six-year-old iShares issue returned 60% in the past 12 months and 20% year to date, as of May 25. On a five-year annualized basis, through May 24, it has returned 34.6% or 18.26% more than the MSCI EAFE benchmark, according to Morningstar. SPDR's has risen 14% since its March debut. Both funds are more than half weighted in Brazil, followed by Mexico, Chile and Argentina. Read more.

DE Smith of

Latin American ETFs Stand Out

Latin American exchange-traded fundsand the benchmarks they track havel managed to stand out with impressive gains this year.

The big two markets, Brazil and Mexico, followed by Chile, have already gleaned double-digit gains less than halfway through the year and have each set new record highs in the past week. The iShares Latin America ETF (ILF) has 88% of its basket directed at Mexico and Brazil. Brazil has for some time been the most overweight country in global equity manager's emerging market portfolios. Strong exports, higher foreign exchange reserves, high commodity prices, political stability and better corporate earnings plus reasonable valuations compared with other emerging and developed markets have all helped propel these markets higher.

Both country's also have stronger balance sheets and some outstanding companies in their ETF baskets such as American Movil and Cemex for mexico. Chile is also known as the star of Latin America for its pro-market policies and the tiny Peru market is the best performing market in the world so far this year.

Michael Mackenzie of the FT reports that Mexico’s Bolsa index of 35 companies has risen 13.3 % this year , while Chile’s Stock Market Select index of 40 companies has rallied 20.4 %. Leading the pack is a 78% rise in Peru’s 34-member index

By Carl Delfeld of the Chartwell ETF Advisor

Brazil Leads Emerging Market Allocations

It may surprise you that based on recent data from EPFR Global of global equity managers including investments in ETFs, that Brazil not China is the country that has the largest allocation. The iShares MSCI Brazil ETF (EWZ) is up 19% year-to-date.

China in fact remained the biggest underweight at 2.44 % followed by Taiwan, Korea, Chile, Israel, Russia and Poland. Brazil, the leading fund overweight, saw its average overweight climb 6 basis points to 2.09%. Turkey, Indonesia, Malaysia and Mexico rounded out the top five underweights among EPFR-tracked funds. . Despite its economic and political missteps, Thailand remained among the ranks of the overweights going into April. And it was joined by Hungary, a regular underweight in recent years due to its large current account deficit.

Thanks to is soaring equity market Brazil stood out in what was otherwise another month of modest month-on-month shifts for country allocations among the major emerging markets fund groups. Brazil’s average weighting was up 101 basis points among Latin America Equity Funds. The volatility shown by key Chinese indexes during March had a modest impact: its average weighting was up 4 basis points among global equity funds and down 49 points among Asia ex-Japan Funds. Both of these fund groups cut their average Taiwan weighting by over 30 basis points, bringing it down to its lowest level since the third quarter of 2004.

By ETF Daddy

iShares S&P Latin America 40 Index (ILF)

(Click on image for larger view)

TOP FIVE Holdings
America Movil SA de CV-Class L 11.55%
Cia Vale do Rio Doce, Sponsored ADR 9.04%
Cia Vale do Rio Doce, ADR 7.98%
Petroleo Brasileiro SA, ADR 7.10%
Banco Itau Holding Financiera SA, ADR 6.28%

MOVING AVERAGES
50 Day | $179.99 200 Day | $159.95

DE Smith of MyPortfolioView.com

Latin American ETFs Go American

The Latin America iShare exchange-traded fund (ILF) which includes exposure to Brazil, Mexico, Argentina and Chile is normally seen to benefit from foreign direct investment. But surprisingly, according to U.S. Commerce Department data, investment from Latin America into America is growing faster than American investment in the region.

Latin American companies have grown in clout as they have shored up balance sheets and look beyond local markets by expanding their overseas reach. The Brazilian oil company Petrobas and aircraft maker Embraer are just two companies making big investments in US markets. Privatizations and market reforms coupled with stronger currencies are some of the reasons companies have been investing in US companies. Mexico is by far the largest Latin American investor in America and about 100,000 Americans now work for Latin American companies.

Keep in mind that 88% of the ILF basket is accounted for by Mexico and Brazil. Investors will soon get a chance to invest in a Chile ETF which is currently in the iShare pipeline and will likely be launched during the next 2-3 months.

By Carl Delfeld of the Chartwell ETF Advisor

Brazil ETF Reflects its Strengths/Weaknesses

The Brazil exchange-traded fund (EWZ) is one of this year's top performing country ETFs and has made many investors a lot of money over the past few years. But despite progress on many fronts, serious impediments to growth remain.

On the positive side, exports are booming, it has FX reserves of over $100 billion, inflation is muted at 3%, the country is a vibrant democracy and, unlike India, it has no serious disputes with neighbors. Still, its economic growth rate over the past four years has averaged just 3.3% versus 7.3% for emerging markets as a whole. Why?

First, it has very weak infrastructure with transport costs consuming 13% of GDP (8% in US), a big spending federal government, corruption and red tape are atrocious and labor laws inflexible. It has weak parties and fragile coalitions leading to no mandate for reform. Most worrisome is its performance in education with almost 50% of its ten year olds functionally illiterate.

My view is that the Brazil glass is 2/3 full - with only incremental, marginal improvements in the above areas, Brazil's growth rate could jump.

The Economist has an excellent survey of Brazil which I encourage you to read.

By Carl Delfeld of the Chartwell ETF Advisor

Latin America ETFs Heat Up

The chart above illustrates the 12 month growth of Latin America. 100 shares of ILF, EWZ and EWW were placed in a portfolio back on January 2006 at a cost basis of $19,516 (highlighted by the green shaded line). The trio reached a high last May of $25,176 for a 30% gain. Notice on the chart the huge reversal in May of 2006 to the downside which took away all their gain plus some. Fast forward to January of this year where despite the correction in May and June of 2006 the region rebounded to end 2006 with a 36% increase in value. So far this year the trio are up better than 11%. IShares S&P Latin America 40 Index (ILF); iShares MSCI Brazil Index (EWZ) and iShares MSCI Mexico Index (EWW)

DE Smith of MyPortfolioView.com

Follow President Bush Down South With ETFs

The Economist describes President Bush's trip to Latin America this week as his "spring break" but there is serious business at hand. In particular, exchange-traded funds or ETF investors should follow his agenda in two countries, Mexico (EWW) and Brazil (EWZ).

In a recent poll for the BBC World Service, 64% of Argentines, 57% of Brazilians, 53% of Mexicans and 51% of Chileans said they had a “mainly negative” view of American influence. But economic ties grow stronger every day. Brazil, in particular, is still one of the cheapest markets in the world with a much stronger balance sheet than even a few years ago. On a price to earnings basis, the main Brazil index trades at just over eleven times earnings. Mexico is a bit more expensive at fifteen times earnings. Keep in mind that 28% of the Mexico ETF (EWW) basket is in two companies: America Movil SA and Cemex.

Mr. Luiz Inácio Lula da Silva, Brazil's president, is expected to visit Mr Bush at Camp David in a few weeks.

Mexico ETF (EWW) XRAY

iShares MSCI Mexico Index Fund (EWW). A review of the Point and Figure chart above paints a picture of consistent growth with demand being in control the majority of the time. Of the nine columns of O’s over the last six years the longest lasted six months back in June 2002. The most significant reversal was in May through June of 2006 when EWW slipped 27% from $44 to $32. Since June 2006 EWW has looked very strong with just minor reversals lasting less than a couple of weeks each. Today EWW is in demand having just broken a double top and trading well about its bullish support.

By DE Smith of MyPortfolioView

Brazil's Strong Balance Sheet

Brazil’s booming stock market has caught foreign investor’s attention but the question  still lurks in the background like an uninvited guest – is this just another leg in the typical boom and bust cycle?

For the answer, take a look at Brazil’s improving balance sheet. While America piles on the debt, Brazil is going the other way. It decided last December to pay off its remaining $15.5 billion debt with the International Monetary Fund (that must be a relief!) and announced just last week that it will retire all of its remaining $6.6 billion worth of Brady bonds issued during the early 1990’s financial crisis

Where is the money coming from? Brazil recorded trade surpluses in 2004 and 2005 with exports for the last twelve months hitting a record $120 billion. Exports of oil, soybeans, copper, steel, autos, sugar and coffee are surging even in the face of a strengthening currency. The Brazilian real is up 52% against the US dollar since May 2004 and up 22% during 2005. Brazil is almost energy independent and foreign exchange reserves are now $58 billion even after paying off the nettlesome IMF debt.

Behind all these positive numbers are substantial reforms begun by President Cardosa and continued by Luiz Inacio “Lula” da Silva. Payroll taxes and corporate taxes have been cut, the tax system simplified and last week Brazil announced that it would eliminate the income tax for foreigners that purchase public debt. Brazil’s strong currency will likely also lead to a loosening of foreign exchange restrictions.   

A cynical friend of mine often comments that successful political leaders need to ignore their strongest supporters if they are to achieve real reform. If so, Lula is a good example since most expected him to reverse market reforms after taking power in 2002 while in fact he deepened them. Up for re-election in October, Lula has nevertheless delivered higher living standards and restored national pride. With 187 million people and an area only slightly smaller than the United States, this leading South American economic power together with Chile and Colombia are changing attitudes toward the region as a whole.

What’s the best way to bet on Brazil’s momentum and improving balance sheet. I had been recommending the Brazil iShare (EWZ) which is up 27% this year and 72% in the last 12 months. In June of last year I switched to the S&P Latin America 40 iShare (ILO) that gives you broader exposure with 50% exposure to Brazil, 38% to Mexico, 9% to Chile and 3% to Argentina. This ETF is up 18% this year and 69% over the last year.

One ADR to take a look at is wireless provider that has been on a tear America Movil (AMX) and a safer option is Colgate Palmolive which derives roughly 20% of its sales from Latin American markets.

How important is the October election to Brazil? Even with all the economic growth, lower debt, lower taxes, booming exports and strong currency, public sector debt is still 51% of GDP so continued progress is essential. Like the old saw goes, even if you are on the right track, if you’re not moving you could get run over.

By Carl Delfeld

Brazil ETF Not Just Commodity Play

In 2006, while investing in BRIC countries was the rage, China and India received most of the attention. The China ETF (FXI) was up 84% and India’s SENSEX index was up over 50%. Meanwhile almost lost in the shuffle, the Brazil ETF (EWZ) was up 45.4% - not bad, not bad at all.

With 187 million people and an area only slightly smaller than the United States, this leading South American economic power together with Chile and Colombia are changing attitudes toward the region as a whole. But the lingering question is whether Brazil’s economic recovery is sustainable or just another stage in the economic cycle. 

What is most interesting to me is that Brazil’s stock market’s performance during the past four years is not due to superior economic growth. It has had an annual average growth rate of only 2.6%, about half of world economic growth during the same period.

My view is that Brazil has been primarily a balance sheet story supported somewhat by the commodity boom. With Brazil’s President Lula being sworn in for a second term today, let’s review Brazil’s accomplishments and challenges.       

Inflation is muted and was only 3% during 2006. Brazil is almost energy independent and foreign exchange reserves are now almost $100 billion after paying off its nettlesome IMF debt. In 2006, it recorded a trade surplus of $46 billion and while interest rates are high, they are beginning to fall. 

What Chartwell ETF Advisor’s Carl Delfeld now wants to see is Brazil turn into more of a growth story. This will depend on the second term reform agenda of President Lula. He is in a strong position with a 70% plus popularity rating and a solid governing coalition. 

Here are some of the issues Brazil needs to tackle to build a sustainable platform for economic growth and a continuing bull market. The tax burden needs to come down from current 50% levels. Public spending needs to be cut but also re-directed to infrastructure projects. Corruption needs to be sharply curtailed and overregulation slashed, especially in labor markets.

Finally, Brazil needs to substantially improve its education standards if it hopes to compete head on with India and China. If Brazil even takes small incremental actions to address these issues, global investors will take note and the Brazil ETF (EWZ) will continue its upward trend.

If interest rates decline as well - it could be another impressive year for investors who don’t forget that BRIC begins with Brazil.