ETFs for Tomorrow

Index funds have long been a Foolish way to gain instant, low-cost diversification without worrying about timing the market. Their ease and convenience may explain the growing popularity of exchange-traded funds -- mutual funds that trade like stocks. According to the Investment Company Institute, ETF assets totaled more than $596 billion of the more than $1 trillion in stock index funds as of April 30 -- a 28% increase over last year, and up $25 billion from March.

Originally modeled after index funds, ETFs have gradually narrowed to target specialized slices of the market. While that's a boon to investors seeking specifically targeted investments, it also concentrates the risks of specialization, tilting a portfolio away from the diversification that makes index investing attractive.

Today, we're looking at the exchange-traded funds that focus on Latin American markets. While much attention is focused on China or India, Latin American economies remain surprisingly strong. In fact, Latin America was the only region in the world to post gains for the first half of the year.

We'll combine that information with the views of the collective intelligence of the 110,000 professional and novice investors at Motley Fool CAPS, to see which funds our participants have rated as the best.

ETF

Net Assets

YTD Return

3-Year Return

CAPS Rating (out of 5)

iShares MSCI Chile Index

$83.3 million

8.6%

NA

*****

iShares MSCI Mexico Index (NYSE: EWW  )

$1.7 billion

5.5%

36.7%

****

iShares S&P Latin America 40 Index (NYSE: ILF  )

$4.8 billion

1.4%

47.9%

*****

SPDR S&P Emerging Latin America

$144.1 million

1.1%

NA

*****

iShares MSCI Brazil Index (NYSE: EWZ  )

$9.8 billion

(4.6%)

52.8%

*****

Source: Yahoo! Finance. CAPS Ratings courtesy of Motley Fool CAPS. NA=not available.

Tread carefully with ETFs, Fools; while the market offers many exchange-traded funds, few have a long history. Not all of our ETFs this week have a three-year return history, which is arguably a key milestone. And only time will tell whether they can continue building a solid track record over longer time periods.

A strategy that pays dividends
The BRIC economies -- Brazil, Russia, India, and China – haven’t really been emerging economies lately; they’ve been exploding ones. And none has been more seemingly consistent than Brazil. Although its stock market is down 6% so far this month, the country has been benefiting from the rise in oil and commodity prices.

Among the top holdings of the iShares MSCI Brazil Index is a diverse universe of mining and oil stocks, including Vale (NYSE: RIO  ) , Petrobras (NYSE: PBR  ) , and Gerdau (NYSE: GGB  ) . (The index isn’t 100% energy and mining, though. It does have 17% of its holdings in financial-services companies.)

Petrobras' mammoth oil discovery last year in its Tupi field has changed the game for the company, and the Income Investor recommendation is contracting with rig-providing firms like Transocean (NYSE: RIG  ) and CNOOC to tap the find for years.

With these large finds open to it, investors like CAPS All-Star Guardian21 see the potential for the stock to reach the stratosphere: "Petroleo Brasileiro may grow into the largest publicly traded company by market cap as it brings its huge recent oil finds online."

Similarly, others, like dan1to3for, simply don't expect there to be enough of a "green" push to wean us off our oil dependency, which spells good news for Petrobras:

[Petrobras] has HUGE reserves. None of the new reserves will be pumped out any time soon, but they should see sustained growth over the long term. With congress not enacting "green" energy subsidies we can expect oil dependence for a while. The Brazilian currency rising only sweetens the price for us.

For miners like Vale, the continued growth of the Chinese economy ought to prove profitable even if the economy falters here in the States. Investors like CAPS player SanElijo figure that the recent secondary offering pushed the stock price down enough to offer a buying opportunity for investors wanting to get in on that growth:

Iron ore will remain in high demand worldwide even if a long U.S recession sets in. This stock is a long term play on Chinese growth. Be aware, this stock is volatile. The recent equity offering dilutes the shares and, in my opinion, helped drive the share price down creating a good buy opportunity. Vale will probably end up making a bid for another good size mining stock at a preminum price l in effort to diversify so more price volality should be expected.

A basket of opinions
Although ETFs have been around since the 1990s, investors should exercise caution with any particular ETF lacking a long track record. Over on CAPS, let us know whether you think these ETFs will continue to outperform, or whether it's time for new ones to top the lists.

Petrobras is an Income Investor recommendation. CNOOC is a Global Gains choice. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the funds mentioned in this article. You can see his holdings here. The Motley Fool has a world-class disclosure policy that has been around the world and back again.


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  • Report this Comment On July 14, 2008, at 5:29 PM, CAPitalist84 wrote:

    I was tempted to put a large portion of my emerging markets investment into EWZ to capitalize on the exploding Brazilian economy. I opted to go with ILF instead to be slightly more diversified but still focusing on the Latin American market. Like everything else its down YTD, but much less than the major market indexes. ILF and EWZ will continue to have solid returns and grow over the long-term.

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