Ride the Pacific Alliance Freight Train With These Top ETFs

Rudy Martin

The fast-developing Pacific Alliance is lighting a fire under cross-Pacific trade activity — without the U.S. government dithering — will force U.S. companies to miss this amazing opportunity.

Charter members Chile, Colombia, Mexico and Peru will have first-mover status in an enormous free-trade bloc.

The U.S. could learn a thing or two from the real "free trade" enthusiasm found in these Latin American leaders. Wall Street Journal editorial writer Mary Anastasia O’Grady said it well in a recent column.

"After a decade of chavismo [the influence of Venezuelan dictator Hugo Chavez], these four countries are what is left of liberal democracy in Latin America."

Fortunately, U.S. investors can still seize the advantage. With a few well-researched investments in key Latin American equity markets, you can get direct exposure to the Pacific Alliance bloc.

Better yet, you can do it with flexible, low-cost Exchange-Traded Funds like these. One of them is my favorite … but I don’t recommend buying it just yet. I’ll explain why in a minute.

First, let’s look at your other great choices …

ETF IDEA # 1: iShares MSCI Mexico Capped ETF (EWW)

Mexico is our closest Latin American neighbor — and the closest the U.S. will get to Pacific Alliance membership, too. EWW is an easy, one-shot way to get a diversified Mexico stock portfolio.

This ETF follows the MSCI Mexico IMI 25/50 Index. Approximately 45% of the portfolio is in the materials, energy and financial industries — the sectors that benefit most from international trade.

With assets around $2.5 billion and a competitive 0.50% expense ratio, EWW is my preferred route to Mexico = and one of the holdings in my Global Trend Trader model portfolio.

ETF IDEA # 2: Global X FTSE Colombia 20 ETF (GXG)

Colombia’s dynamic economy is easy to see. Just look at the benchmark FTSE Colombia 20 Index of the country’s largest stocks. The country’s leading role in global trade shows up in these thriving materials, energy and financial stocks.

GXG, a $148 million U.S.-listed fund, tracks the index and is easy for small investors to buy and sell. The expense ratio is a little bit high, but I expect it will decline quickly as GXG attracts more interest.

ETF IDEA # 3: iShares MSCI Chile Capped ETF (ECH)

Chile is the Latin American free-market champion. Chile is arguably the most developed of the four Pacific Alliance charter nations. I think its diversified economic base will take full advantage of new trade through the Pacific Alliance.

ECH tracks the MSCI Chile Investable Market Index. The $434 million ETF has almost half its assets in the high-growth materials, energy, financial and industrial sectors.

ETF IDEA # 4: iShares MSCI All Peru Capped ETF (EPU)

With long-standing cultural and economic ties to Asia, I expect mineral-rich Peru will lead the Pacific Alliance westward. EPU is designed to match the price and dividend yield of the MSCI All Peru Capped Index. As you might expect, EPU is heavy on materials with a 45% weighting, followed by financials at 28%.

With this sector combination, EPU is in a great position to grow with Peru’s exports. A $294 million asset base makes EPU a reasonably liquid way to gain Peru exposure.

ETF IDEA # 5: Global X FTSE Andean 40 ETF (AND) — DON’T BUY YET!

On paper, this ETF seems like a good way to wrap my other three ideas into one neat package. AND holds the 40 top stocks from the three Andean mountain nations. Currently it has 53% in Chile, 28% in Colombia and 19% in Peru.

Heavily concentrated in materials and energy, the AND portfolio stocks should participate as their countries export materials in the new free-trade area.

Why, then, do I not recommend this ETF? I have two reservations.

First, I’m not convinced this year’s slide in raw material prices is finished. I want to see a more-decisive bottoming and reversal process.

Second, and more important, with assets under $10 million, AND is simply too small. This is a problem for any ETF, and doubly so when some of the component stocks are themselves thinly traded. Bid/ask spreads tend to be very wide — which places individual investors at a severe disadvantage.

I’m definitely watching AND closely. I hope it gains assets and liquidity so I can more comfortably recommend it for my subscribers. For now, I think a combination of GXG, ECH and EPU is better

However you get there, I think investing in the Pacific Alliance nations will pay off in the end. Free trade is one of the best ways to create prosperity for everyone — and profits for investors who get in early!

Best wishes,