The MSCI Emerging Markets Latin America Index is a free-float market-cap-weighted index. It includes large- and mid-cap companies across five emerging-markets countries in Latin America, including Brazil (60%), Mexico (20%-25%), Chile (5%-10%), and Peru and Colombia (2%-5% each). With 114 constituents, the index covers 85% of the readily available shares in each respective country.
New entrants must pass minimum requirements for liquidity and length of trading history. The index is reviewed quarterly and rebalanced semiannually with new size cutoffs for mid- and large caps calculated.
At the sector level, financials (30%-35%) is the largest, followed by consumer staples and materials (15%-20% each).
The biggest holdings are Itau Unibanco (6%-8%), Brazil's largest privately run bank; Vale, one of the largest producer of iron ore and nickel globally; and Bank Bradesco, Brazil's third-largest bank (5%-7% each).
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This fund's ongoing charge of 0.20% makes it the cheapest offering in the Latin America equity category.
The annualised tracking difference (fund return less index return) during the past three years for the period ended February 2019 was -0.44%: tighter than that of its exchange-traded fund peers.
Other costs potentially carried by the unitholder include bid-ask spreads and brokerage fees when buy and sell orders are placed for ETF shares.
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The fund uses synthetic replication to capture the performance of the MSCI Emerging Markets Latin America Net Return Index. Instead of holding the securities in the index, the ETF enters into a total-return swap agreement with BNP Paribas. In this transaction, the ETF uses investors' cash to buy a substitute basket of securities and exchanges their performance for the return of the index. Amundi has a policy of systematically resetting the swap at the end of each business day, bringing counterparty risk exposure temporarily to zero. Eligible securities for the substitute basket, which can vary from day to day, include mainly stocks in the MSCI Europe Index and/or stocks from the underlying index and, to a lesser extent, stocks in the S&P 500 and/or the Nikkei 225. Additionally, the UCITS diversification rule applies.
The fund does not engage in securities-lending activity.
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We do not have a strong conviction that Amundi MSCI EM Latin America ETF will outperform its Morningstar Category peers in the long term. While the fund’s low fee should contribute positively to its long-term returns relative to category peers, its inability to move down the market cap spectrum to find value gives it a structural disadvantage. As such we grant a Morningstar Analyst Rating of Neutral to the fund.
The MSCI Emerging Markets Latin America Index is market-cap-weighted and spans 114 constituents, covering approximately 85% of the free-float market capitalisation in each country. While the name suggests a broad regional exposure to Latin America, the index is heavily biased towards two countries: Brazil and Mexico, which make up around 85% of the fund. Chile, Colombia, and Peru account for the remaining 15%. This country allocation is broadly in line with that of other offerings in the Latin America equity category.
The MSCI EM Latin America index also significantly overweights large caps. As of this writing, the index allocated only 8% to mid- and small-caps, while the average fund in the category assigned approximately 26% to that segment.
The index's large-cap bias has contributed to the fund's average to below-average risk-adjusted performance over three and five years relative to category peers. Over the past decade, small- and mid-cap stocks have outpaced large-cap stocks in the Latin America equity market. Active managers have been able to add value in this market by tilting towards mid-caps and higher-quality stocks.
The fund’s ongoing charge of 0.20% is the lowest in the category. Because of its low cost, its three-year tracking difference (fund return minus index return) has also been tighter compared to other passive funds tracking the same benchmark.
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Active managers in the category have shown an ability to add value in the Latin America equity market by tilting towards higher-quality mid-cap stocks, while running more concentrated portfolios with an average number of holdings of 60. Approximately half of the active funds in the category had better risk-adjusted returns than passive funds tracking the MSCI Emerging Markets Latin America Index over the past three- and five-year periods ended February 2019.
One common measure of a stock’s quality is its average return on invested capital, which reveals how effectively a company invests its assets. The past trailing 12 months average ROIC for the MSCI Emerging Markets Latin America Index was 9.2 versus 10.5 for category average. Meanwhile, the average debt/capital ratio for the index was 44.1 versus 40.2 for category peers over the same period. The fund's lower exposure to quality stocks has also translated into lower valuations.
Investors should acknowledge the sector or industry bias of the region, given the major economies such as Brazil and Mexico are significantly dependent on natural resources. Tracking the market-cap weighted index, the fund is inevitably overweight in cyclical sectors such as financials and materials.
Another risk investors should be aware of is currency risks. Over the past five years, US dollar-based investors in Latin America have experienced losses driven by a depreciation of local currencies. Such uncertainties add volatility on top of impacts from commodity price movements.
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Several providers offer exposure to the MSCI Emerging Markets Latin America Index, including Lyxor, HSBC, SPDR, and Xtrackers. However, ongoing charges for these funds are higher, ranging from 0.55% to 0.65%.
Investors may also consider iShares MSCI EM Latin America ETF, which tracks the MSCI Emerging Markets Latin America 10-40 Index. The index takes into consideration the 10/40 concentration constraints imposed by the UCITS III Directive. By imposing stock caps at 10% and sector caps at 40%, the index is less prone to concentration. However, its higher cost of 0.74% makes it over 3 times more expensive than Amundi MSCI EM Latin America ETF.
In the Latin America equity category, investors can also choose among Morningstar Medalist active funds.
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