Best Latin America ETF Bets For 2H16

After a troubled past, Latin American investing has turned a page to start 2016. Several Latin American ETFs have delivered double-digit returns so far this year (as of July 8, 2016) and kudos go to the spike in commodity prices (read: Commodities Enter Bull Market: 6 ETF Winners).

Investors should note that Latin American economies are rich in commodities and thus an uptrend or downtrend in the commodity market makes or breaks the fate of investing in related stocks or products. Earlier, commodities were out of favor due to a stronger greenback and unfavorable demand-supply dynamics. This wreaked havoc on Latin American currencies.

Inside 1H16 Surge

The year 2016 is writing a different story for the commodity market and in turn for Latin American investing. The first and foremost reason behind this is the soggy greenback amid moderation in U.S. growth. Since most of the commodities are linked to the U.S. dollar, a weaker greenback has mainly supported the commodity rally this year. Notably, the Dollar ETF PowerShares DB US Dollar Bullish ETF (NYSE:UUP) (UUP) has lost about 2.8% this year (as of July 8, 2016) (read: These Commodity Currency ETFs Outpacing Dollar to Start 2016).

If this was not enough, the start of 2016 was extremely rocky with heightened global growth concerns and deflationary fears. While things started to improve from Q2, Brexit fears took the center stage in June, propelling safe-haven metals like gold and silver. Also, tight supply conditions boosted prices of a wide range of commodities including oil and a few agro-based commodities. All these ushered gains on the commodity-heavy Latin American ETFs.

So far this year (as of July 8, 2016), some of the top-performing Latin American country ETFs are iShares MSCI All Peru Capped ETF EPU, iShares MSCI Brazil Small-Cap ETF EWZS), iShares MSCI Brazil Capped ETF EWZ and Global X MSCI Argentina ETF ARGT, which have advanced about 59%, 50%, 47% and 24.9%, respectively.

Best Bets for 2H?

Since we’re already halfway through the year, it is the time to look at the ETFs that be apt to play in the coming days.

Why Are Peru and Argentina Top Picks?

Case for Peru: Though several metals have held steady lately on a likely pickup in industrial demand, the real strength lies in safe-haven assets gold and silver. In fact, a few bullish analysts believe that gold can hit as high as $1,425–$1,500 per troy ounce this year on Brexit consequences and a shaky global macro backdrop (read: Peru ETF Shining on Gold Rally).

A flurry of negative interest rates in several European economies and even in Japan will likely brighten demand for the non-interest bearing asset gold. In such a scenario, economies that are exploring more gold will invariably see a surge.

As per sources, Peru remains the top gold-producing country in the Latin American pack in recent times, thus acting as the best bet right now. Though Peru ETFEPU has already seen a steep ascent this year, investors can play this surging ETF further. This is especially true as EPU has a weighted alpha of positive 29.60. A positive alpha hints at more gains.

Case for Argentina: This country is expected to cash in on political optimism. The election of the pro-growth president Mauricio Macri in December is the wining key of this investment. The government is striving to enhance the country’s worth to foreign investors by reducing subsidies or easing currency control.

If this was not enough, IMF’s words of appreciation about Argentina's data reform are likely to set the country ETF on fire. ARGT has a weighted alpha of positive 25.10, giving another reason to investors for further play (read: Is Argentina on a Revival Path? ETFs in Focus).

Why Not Brazil, Chile, Colombia and Mexico?

It wasn’t solely commodity that was giving a boost to Brazil ETFs. The recent rally came on the back of speculation regarding a change in government. Impeachment trials against former president Dilma Rousseff led to a spurt in Brazil ETFs. Now it remains to be seen if the stand-in president Michel Temer is able to effectively implement measures to revive the struggling economy (read: Has Brazil Recession Bottomed? ETFs to Watch).

Chileis also famous for gold exploration, but there are other metals – for example copper – that are not performing well. The value of Chile's copper exports plummeted 16.1% in 1H16 from 1H15. This factor will take some luster out of the Chile ETF iShares MSCI Chile Capped (WA:ECH) .Moreover, Chile and Brazil are largely tied to the Chinese economy – one of its key trading partners that is presently seeing a rough patch. ECH has a weighted alpha of positive 4.40.

Colombia is yet another destination to playthe surge inoil, gold, coal, and coffee, as per Global X. But higher inflation is a drag to this economy which forced the central bank to resort to rate hikes. A seven-year high borrowing cost leaves less scope for Global X MSCI Colombia ETF GXG to outperform.GXG has a negative weighted alpha of 2.50.

Mexico is a huge beneficiary ifoil price gains, but it suffers from weaker currency. In fact, Mexico raised its key interest rate post Brexit to hold the plunge in its currency peso. All in all, Mexico investing is highly vulnerable to external shocks as its currency “peso is often used as a proxy for risk in other markets.” With risk factors flexing muscles across the globe, Mexico ETFs likeiShares MSCI Mexico Capped ETF EWW do not seem lucrative right now.