Latin American ETFs in the spotlight at the ETFGI Summit

Latin America stands to benefit from the increasing demand for ETFs as investors look to diversify their portfolios, according to speakers at April’s ETFGI Global ETFs Insights Summit.

Investors are increasingly looking to Latin American exchange-traded funds (ETFs), as the region looks to capitalise on the wider global shift towards the industry, speakers told the third annual ETFGI Global ETFs Insights Summit on 27 and 28 April.

According to figures from ETFGI, as of March 2022, there were $19.6bn of assets under management in ETFs in Latin America out of a total of $10.1trn worldwide, up 31.8% year-over-year.

Internationalisation is a key driver of ETFs in the region, Nicolas Gomez, managing director and head of Latin America iShares at Blackrock, told the conference. “Investors are building simple, diversified international portfolios with exposure to the US, Europe and emerging markets. ETFs are a building block of that,” he said. “The pendulum is swinging to ETFs from actively managed mutual funds.”

 

Key LATAM countries and sectors to watch

Adriana Rangel, head of institutional sales at Vanguard LATAM, said that in the Chilean mutual funds industry international allocations have increased from 11% to 15% this year, with Mexico at a record 23%.

“Pension reform regulations in Mexico, such as the capping of fees, have given a tailwind to investors saving for retirement,” Rangel said. “It has created an opportunity for managers to enhance returns allowing for more exposure to international equities. ETFs are a low-cost way to do this.”

Gomez said he was seeing more demand for ESG exposures, single country ETFs and those tracking currencies such as the dollar, the euro, short duration treasuries and European government bonds. Thematic ETF investing is also growing in demand in Latin America particularly for cyber security, aerospace and defence themes.

“Fixed income ETF demand is also very strong. We saw how well they behaved in the volatility of Covid,” he explained. “There is more liquidity in these ETFs versus underlying bonds.

Global ETF boom

The rise of Latin American ETFs is part of a broader global investment shift towards ETFs, Deborah Fuhr, managing partner and founder of ETFGI, explained.

There has been a 17.8% hike in assets under management globally year-over-year to March 2022, driven by equity-focused ETFs, fixed income and commodities such as gold.

“The war in Ukraine and rising inflation has seen huge net inflows into gold. It is one of the biggest changes we have seen this year,” Fuhr said. “We are also seeing more demand for smart beta [and] ESG, particularly in Europe, and themes.”

She sees this demand continuing and expects the sector to expand at a compound annual growth rate of 21% over the next 10 years.

Fuhr also agreed with Gomez that the mood was shifting from active managed funds to ETFs. “It is difficult to find active funds which consistently beat the benchmark. The alternative is to buy an ETF and get the benchmark and get alpha through asset allocation,” she said. “ETFs are also being embraced by active managers as a solution to help them do their jobs. Robo-advisers are also driving both the demand for and use of ETFs as they are educating financially illiterate investors about the benefit of low-cost ETFs. They have had a bigger impact on ETF adoption than they get credit for.”

What the future holds

Another key session at the event was a look at the global economic outlook from Gabriela Santos, global market strategist at JPMorgan Asset Management. She was optimistic about the US and its chances of avoiding recession, suggesting that there should be another good year of growth ahead.

“Over the next 12 months I would put the chance of a US recession at between 15–30%,” Santos said. “That may sound like a lot, but of course 70% says there isn’t a chance of recession. We are seeing strong momentum as we emerge from the pandemic, such as services consumption getting back to normal. Consumers still have a cushion of savings, around $2.1trn of additional cash. That is a really powerful voice in the economy. I am also seeing strong earnings reports from US companies.”

“A lot of risks remain there such as very low productivity and economic growth. It is important for clients in Latin America to diversify globally” - JPMorgan global market strategist Gabriela Santos

She was less optimistic, however, about European economies hit by higher energy costs and commodity prices, stating that there is a 50/50 chance of the region going into recession.

One country not seeing high inflation or higher interest rates is China. Santos is still ‘overweight’ on the country despite its zero-Covid policy hitting economic performance. “China is the cheapest it has been since 2006 but the return opportunity there is high especially in business technology, domestic consumption and decarbonisation,” she said.

As for Latin America, she said its stock markets were some of the best performing in the world at present, boosted by those higher commodity prices. But she urged caution.

“A lot of risks remain there such as very low productivity and economic growth. It is important for clients in Latin America to diversify globally,” Santos said.

Gomez said that could mean another record year for Latin America ETFs. “We do see more of that international diversification as local investors look away from local assets,” he said. “We see local asset managers launching international exposure funds and ETFs and strong ESG flows as pension funds see them as being more attractive. 2022 will be even stronger than 2021.”