YPF - ILF: Value Seen In Latin America Patience Needed For The Breakout

2023-11-22 22:00:00 ET

Summary

• iShares Latin America 40 ETF has robust returns and relative strength compared to the S&P 500 in 2023.
• ILF has a high dividend yield and moderate expense ratio, but investors should be cautious due to volatility.
• ILF's portfolio is concentrated in large-cap value stocks, with a significant allocation in the Financials sector and Materials space.

It's hard to find much alpha across the Emerging Markets space. The group of up-and-coming economies has featured elevated volatility in those stock markets over the last decade, while both absolute and relative performance trends have been frustrating for the bulls. Venture to South America, however, and you will find not only robust 2023 returns but also relative strength compared to the S&P 500.

I reiterate my holding rating on the iShares Latin America 40 ETF (ILF). I continue to like its valuation and high dividend yield, but the situation on the chart still shows that there’s work to do before investors should get too optimistic.

YTD ETF Performance Heat Map: ILF Outperforming SPY in 2023

According to the issuer , ILF focuses on investing in the public equity markets of Latin America and the Caribbean. The fund targets growth and value stocks of large-cap companies across various sectors and it aims to track the performance of the S&P Latin America 40 index, which consists of the 40 largest Latin American stocks.

ILF is a moderate-sized ETF with slightly more than $1.6 billion in assets under management and the fund sports a high 8.3% dividend yield – ILF has a history of paying out large year-end distributions , so investors considering owning the fund in a taxable account should take that into consideration over the coming weeks.

Share-price momentum has been very strong over last year, earning the ETF a strong A ETF Grade, according to Seeking Alpha. With a moderate 0.48% annual expense ratio , it’s not a terribly pricey fund to own for longer-term investors either. Still, there can be risk and high volatility with this focused ETF, but liquidity readings are robust with average daily trading volume of more than 1.1 million shares over the past three months.

Digging into the portfolio, the 3-star, bronze-rated ETF by Morningstar shows that the majority of its assets are considered large-cap value with a sizable percentage of its allocation in large-cap blend. There’s little in the way of growth exposure, so prospective investors should recognize that ILF will stray significantly from returns on the S&P 500.

With a low 7.1 price-to-earnings ratio, there is a legitimate value case with Latin American stocks. Of course, political risk is also material. Earlier this month, that risk turned out to be a reward with the surprise election of Javier Milei, a reportedly pro-business politician who could privatize some companies in Argentina. I wrote about this regarding YPF Sociedad Anonima (YPF) a few days ago. Though ILF does not hold any Argentine equities, it could still be a potentially bullish trend across the region.

ILF: Portfolio & Factor Profiles

Another important consideration is ILF’s individual-stock concentration. Roughly one-quarter of the fund is invested in just three companies. So, monitoring developments with Vale SA ADR ( VALE ), Petroleo Brasileiro SA Petrobras ADR ( PBR ), and Itau Unibanco Holding SA ADR ( ITUB ) is important. What’s more, more than 30% of the ETF is invested in the Financials sector with a high 22% weight in the cyclical materials space. Those are both large overweights compared to the S&P 500’s sector breakdown.

ILF: Holdings & Dividend Breakdowns

Seasonally, ILF tends to rally nicely from late November through mid-January before volatility often strikes, according to data from Equity Clock .

ILF: Bullish Near-Term Seasonal Trends

The Technical Take

ILF continues to trade within a long-lived consolidation pattern. Notice in the chart below that shares have met selling pressure on periodic approaches to a downtrend resistance line that dates back many years (if we were to zoom the chart out). Support is found at an uptrend line from its March 2020 low through July last year, and on a recent test just a few weeks ago.

Encouraging, though, is that ILF’s long-term 200-day moving average has been positively sloped for much of this year. Just recently, the RSI momentum indicator at the top of the graph also has a bullish move, poking above 70 as buying pressure picks up. Still, I would like to see ILF close above the downtrend line before getting too excited. Longer-term, resistance I pointed out in my previous analysis is still in play around the $35 mark.

Overall, the chart has some hopeful signs, but we need a few more solid weeks to get ILF above noted resistance.

ILF: An Ongoing Consolidation, Improved RSI Momentum

The Bottom Line

I reiterate my hold rating on ILF. It is getting close to breaking out, and recent positive political developments in Argentina are hopeful, but an all-around bullish case is not quite complete.

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