Three Ways into South America with ETFs

In last week’s column we looked at some ETFs focused on the booming countries of Southeast Asia. Today we’re turning our spyglass in a different direction. We’re looking at the southern portion of the western hemisphere — South America.

If you participated in the Weiss Global Forum earlier this week, you heard us talking about Brazil as the hub of its continent. The parallels with China are very interesting …

• Both China and Brazil are much larger than their neighbors, in land mass and population.
• Both countries have long coastlines, massive mega-cities, vast interiors and huge river basins.
• And both were relatively impoverished nations for decades and have vaulted into the modern world practically overnight.

There’s another common thread, too. As has happened in the China region, the smaller nations surrounding Brazil are feeding off the biggest fish in the pond. Meaning that the wealth Brazil earns from its trade with the developed world spreads throughout the region.

Brazil is making its neighbors rich.

Funds targeting Brazil and Mexico have been around for years as have funds encompassing all of Latin America (both Central and South America). And earlier this summer I showed you Six Ways to Brazil through ETFs.

These are a good start. But if you don’t pay attention to the rest of the countries in the region you could miss out on some golden opportunities. Until recently though, there was no easy way for U.S.-based investors to zero in on the key nations of South America.

Where are those opportunities? I’ll tell you about three of them. And with new ETFs coming out all the time, I expect we will have more alternatives soon. For now, consider these three as ways to balance out your emerging market portfolio …

South American Alternative #1:
iShares MSCI Chile (ECH)

Chile is the long skinny country on the Pacific coast of South America. Unlike the other two countries we will talk about below, Chile doesn’t actually share a border with Brazil. Nonetheless, the two are close commercial partners — both became members of a regional free-trade pact in 1996.

At the same time, Chile has a strong, vibrant economy in its own right. A market-oriented economy and fiscally sensible government have combined with rich natural resource deposits to make Chile a leader in the region.

ECH is the only ETF focused on Chilean stocks. It came out in late 2007 and will have its three-year anniversary later this year. The shares more than doubled in the period between October 2008 and January 2010 and this year have headed even higher.

South American Alternative #2:
iShares MSCI All Peru (EPU)

Peru lies north and west of Brazil. The mighty Amazon River originates in the Peruvian Andes before flowing through Brazil’s rainforest.

Peru’s economy was once simply another Third World basket case. But that all changed in the 1990s when President Albert Fujimori launched a plan to convert the nation into a free-market system. He was largely successful, and Peru has been booming ever since.

Minerals are a major export for Peru.

EPU is dominated by materials stocks, reflecting the nation’s key mining sector. Copper, gold and zinc are some of Peru’s top exports. The government has been cooperative in allowing global miners to partner with local firms, and the result has been a win for everyone.

South American Alternative #3:
Global X/InterBolsa FTSE Colombia 20 (GXG)

Here’s something I bet you didn’t know: Colombia is the second-most populous nation in South America, exceeded only by Brazil. It was one of the first areas to be colonized by Spanish explorers. After independence, Colombia ruled over the area that is now Panama right up until 1903.

Cartagena was a prize for the Spanish explorers, now it’s an up and coming business center.

The Colombian economy faced a serious challenge from drug-related violence in the 1980s and 1990s. More recently, the government gained the upper hand as much of the drug trade moved elsewhere. Now Colombia is modernizing quickly.

The local economy is still highly dependent on natural resource exports (did you know that 70 percent of U.S. cut flower imports come from Colombia?). But the manufacturing and financial sectors are growing fast too.

GXG took off like a rocket after coming out in early 2009 — right near the global market lows. Since then the shares have doubled in value and gone even higher! GXG may look frothy after all these gains. But if Colombia continues to grow, it could shoot up even more. This is definitely an ETF to keep on your watch list.

As you can see, ETFs give you ways to get involved in South American growth that go far beyond the borders of Brazil. Check out ECH, EPU, and GXG and think about whether they fit into your portfolio.

Best wishes,

Ron

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