SET Monthly Issue September 2017

| September 5, 2017


How much of your portfolio should be invested in global stocks?  Like any other investment question, the annoying and predictable answer is, “It depends.”  Over the past year, there’s been a growing thirst for global stocks as U.S. stocks remain lodged in the high rent district.

There’s also the dollar to keep in mind.  The recent slump in the strength of the beat-up U.S. buck suggests that confidence in the Trump Administration’s economic policies could be sagging.

But that’s a sideshow to the main event… the opportunity to capture both growth and income on global markets.

Between 2011 and 2016, U.S. stocks trounced global stocks in terms of performance.  U.S. stocks were up 62% and global stocks were down 10%.

Now, the gap is closing.  We’re seeing signs of life on global markets.  So far this year, the Vanguard Total International Stock ETF (VXUS) is up 18%.

So… where in the world to invest?  Europe?  Asia?  Where are the best opportunities?

Earlier this year, we recommended the iShares MSCI Switzerland Capped ETF (EWL).  It’s outperforming overall global markets, up 19% YTD.

Our search for another region where global stocks can reward investors has led us south of the border.

We’re ignoring a lot of doom and gloom.  This month’s recommendation is The iShares Latin America 40 ETF (ILF). 


When you look at the region, Brazil drives the bus for investors in Latin America.  It dominates the region’s economies.

But Brazil isn’t exactly an orderly and predictable place.  There’s no stable political leadership.  The country lumbers from one crisis to the next.  For investors, this drama is all too real.  The same goes for its citizens, who are now enduring record-high unemployment and the most severe recession in its history.

One day this spring, the Brazilian stock market took a 10% hit immediately after the opening.  The year’s gains were wiped out in less than an hour.  With chaos on the trading floor, market officials halted trading for 30 minutes.

That same day, Brazil’s currency, the real, lost 7% of its value against the U.S. dollar.

What happened?

Nothing at all in terms of the performance of the companies listed on the exchange.  And nothing in the way of a significant change in economic policy.

It was all triggered by political fallout after bribery allegations were made against Michel Temer, Brazil’s President.

Since then, a court has rejected the charges.  But Temer is hardly out of the woods.  We wouldn’t be surprised to see his administration swamped by new scandals, and from our vantage point, the President’s survival is hardly a given.

So, with all this turmoil rumbling through Latin America’s #1 economy, why would we even consider investing in the region?

And what about Venezuela?  It’s a train wreck.  Sanctions from the U.S., the energy industry in tatters, growing political dissent, dismal human rights abuses… the list goes on.

But here’s the thing.  Brazil and Venezuela are two entirely different situations.

In Brazil, there is a much stronger economy.  Last month, S&P Global removed Brazil’s credit ratings from its watch list because, “The economy appears to have stabilized despite fluid politics.”

We don’t have to worry about Venezuela, not directly, because none of the companies tracked by The iShares Latin America 40 ETF are Venezuelan.  That’s not to say there’s zero impact… other Latin countries export to Venezuela, but overall, the exposure is minimal.

We see Latin America as a flawed, but favorable, region for investment.  The flaws are political.  The opportunities are defined by the everyday needs of its citizens.

People will continue to buy cell phones and soda.  These are two of the businesses of the top stocks tracked by The iShares Latin America 40 ETF. 


The ETF mirrors the S&P Latin America 40.  The stocks tracked are large caps.  The breakdown of stocks by country…

  • Brazil: 18
  • Chile:  10
  • Mexico:  8
  • Peru:  3
  • Colombia:  2

(Note the absence of any Venezuelan stocks)

The largest concentrations by sector…

  • Financial Services:  34.08%
  • Basic Materials: 17.44%
  • Consumer Defensive:  17.23%
  • Energy:  9.36%
  • Consumer Cyclical:  5.87%

The fund has assets of $1.02 billion.  The expense ratio is 0.49% and the P/E ratio is 13.76.


It’s tightly focused on large cap stocks.  It’s diversified both by country and by industry sector.  The expense ratio is low and the ETF trades at a price below broad market averages. 


Company Name Country/Sector % Weight
Itau Unibanco Holding SA ADR Brazil/Finance 9.07%
Vale SA ADR Brazil/Natural Resources 7.06%
Bank Bradesco SA ADR Brazil/Finance 7.00%
Ambev SA ADR Brazil/Beverages 6.11%
America Movil SAB de CV Class L Mexico/Telecom 5.03%


Itau Unibanco Holding SA ADR NVIDIA Corp. (ITUB)

Based on market value, the firm is the 10th largest bank in the world.  It is the leading Latin American bank measured by assets and market capitalization.


Vale SA is the world’s #1 producer of nickel and iron ore. It produces a range of minerals including manganese, copper, bauxite, and potash.  Vale also owns railways and other shipping infrastructure. 

Bank Bradesco SA ADR (BBD)

Bradesco is the #3 bank in Brazil based on total assets.  It operates 5,314 branches, but more noteworthy, it runs 38,430 “Bradesco Expresso” units in supermarkets, drugstores, and other retail outlets.


Ambev S.A. is a subsidiary of Interbrew International B.V., which is a subsidiary of Anheuser-Busch InBev SA/NV.  It’s the largest brewery firm in Latin America and #5 globally.  Ambev was created in 1999 following the merger of the Brahma and Antarctica breweries. 

America Movil SAB de CV Class L (AMX)

The Mexican telecommunications corporation provides services to 289.4 million wireless subscribers, 34.3 million landline customers, and 22.6 million broadband subscribers.  It is a venture of the well-known financier Carlos Slim.


The iShares Latin America 40 ETF (ILF) provides global exposure with a regional focus.  It is not a good ETF to invest in if you’re easily troubled by sudden swings.

Keep in mind what’s been happening in Brazil… this ETF is directly impacted.  On May 16, ILF closed at $32.87.  Two days later, it was at $28.66.

This is a long-term position which is better suited for growth than income.  It pays a modest yield of 1.81%.

We’ve noted our concerns, which are largely driven by Latin America political intrigue.  We should also point out that so far this year, the ETF has done very well.  We’re not exactly buying this on sale…

iShares Latin America 40 ETF

The recovery since Brazil’s turmoil in May has been solid.  We would not be surprised to see another setback, so depending on your portfolio, you may decide to pick up a small number of shares now and be ready to make an additional investment on a dip.

Trade Alert

Buy: iShares Latin America 40 ETF (ILF) up to $35.50

Recent Price:  $34.80

Price Target: $43.00

Stop Loss:  $33.00




Consumer Discretionary XLY +10.65%
Consumer Staples XLP +6.30%
Energy XLE -15.59%
Financials XLF +6.54%
Health Care XLV +17.83%
Industrials XLI +10.23%
Materials XLB +11.53%
Real Estate XLRE +7.08%
Technology XLK +21.55%
Utilities XLU +12.83%



. . . . Global X Robotics & Artficial Intllgence ETF (BOTZ) – HOLD

The sector is surging.  The ETF is up 4% since our recommendation last month.

. . . . Vanguard Financials ETF (VFH) – HOLD

There’s been some profit taking… following a strong July, the big banks gave up some ground in August.  There’s been no substantive change in the sector, and we’ll continue to hold.

. . . . VanEck Vectors J.P. Morgan EM Local Currency Bond (EMLC) – HOLD

The ETF we were attracted to for yield, now at 4.96%, is rewarding us with an uptick in the price as well.  EMLC is up 2% since our recommendation in June.

. . . . Vanguard FTSE All-World ex-US Index Fund ETF (VEU) – HOLD

The past few months have been full of momentum for the ETF, which recently hit a 52-week high.

. . . . SPDR S&P Metals & Mining ETF (XME) – HOLD

We’re glad we held on through a dip earlier this summer.  XME has more ground to make up to reach its Q1 highs, but moving in the right direction as global demand for metals rebounds.

. . . . iShares MSCI Switzerland Capped ETF (EWL) – HOLD

Our “shelter from the storm” ETF is giving us the safety we sought.  EWL is paying a 2.16% yield and has held onto the strong gains posted in May.

. . . . Vanguard REIT ETF (VNQ) – HOLD

Another ETF we recommended for income.  Current yield is 4.38%.  We wouldn’t be surprised to see rumblings in the bond market drive more investors into real estate over the next few months, and for VNQ to gain more ground.

. . . . First Trust ISE Global Engineering & Construction Index Fund (FLM) – HOLD

There’s still nothing in the way of significant infrastructure spending from the Federal Government.  But even without dollars from D.C., global construction activity is healthy, and the ETF is doing well.

. . . . Vanguard High Dividend Yield ETF (VYM) – HOLD

Current yield is 2.90%, which is softer than we expected.  But despite being held back by Exxon Mobil, one of its largest holdings, the VYM share price continues to grow.

. . . . Utilities Select Sector SPD (XLU) – HOLD

No changes.  A rebound in value, continue to hold.

Portfolio Changes

  • Buy iShares Latin America 40 ETF (ILF)

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