VALE - Latin American Equities A Risky Bet Today Wait For A Dip On ILF

2023-04-14 14:21:19 ET

Summary

• Latin America 40 ETF is down over the last 6 months while most other areas are in the black.
• With high exposure to value and cyclical sectors, ILF may feature volatility in the coming months.
• With shares consolidating, I want to wait for further evidence to buy on this high-yield fund.

Latin American equities were a hot trade a year ago. Recall how rising commodity prices were a boon to the resource-rich region. In the last six months, though, the Latin America 40 ETF (ILF) is one of the few regional funds with a negative total return.

This comes as global stocks have done particularly well amid a weaker US dollar since September and rising commodity prices in the nearer term. What's more, copper and gold prices are jumping, normally a tailwind for Central and South American-domiciled companies, but we have not seen that kind of price action for much of the year.

6-Month ETF Performance Heat Map: ILF Negative

According to the issuer , the iShares Latin America 40 ETF seeks to track the investment results of an index composed of 40 of the largest Latin American equities. The fund offers investors exposure to large, established companies in Latin America and should be considered emerging markets play.

With an annual expense ratio of 0.47%, it is more expensive than other broad-based EM index funds but still features solid tradeability as evidenced by a 30-day median bid/ask spread of just 0.04%. ILF's average daily volume is not all that high, however, at slightly less than 700,000 shares.

Income investors might be intrigued by ILF's trailing 12-month dividend yield of more than 11%. Along with that high rate, the ETF sports a low forward P/E ratio of 5.2, per iShares as of April 12, 2023, but it is a volatile fund with a 3-year standard deviation of nearly 30%.

Digging into the portfolio, ILF is primarily a large-cap fund with a slight bent to the value style, according to Morningstar . The fund indeed ranks high on the yield factor while momentum and quality are middle of the road. Investors should monitor trends in ILF's largest position - Vale (VALE) - which is a 15% weight in the ETF. The next-highest position is a slew of stocks each with about a 5% position.

ILF: Portfolio & Factor Profiles

ILF's sector breakdown makes it clear that it will move much differently compared to the S&P 500. Consider that the Financials sector is nearly one-third of ILF while Energy & Materials, two small weights in the SPX, sum to 38% of ILF. And you will not find much growth with ILF since the Information Technology and Consumer Discretionary sectors are scant - in fact, there is no IT exposure. ILF is certainly a cyclical fund.

ILF: Low Exposure to Growth, High Weights in Value & Cyclicals

Seasonally, data from Equity Clock suggest ILF tends to be shaky now through late June before shares typically rise during the back half of the year. Notice in the aggregated seasonal chart below that most of the annual returns come during the second half. So now may not be the best time to buy based on these trends.

ILF: Lackluster Price Trend Through June Often Seen

The Technical Take

ILF is simply consolidating off the $31 peak nearly one year ago. After plunging to just above $20 by mid-July last year, the ETF began to coil with a series of lower highs and higher lows. Right now, I see resistance at its downtrend line that is in play near $25, while support is seen in the $22 to $23 range. Perhaps more importantly, a horizontal support line is just above $20.

Long-term investors can own ILF here with a stop under $20, but I would like to see the regional ETF rally above the Q4 2022 peak of $27.36 to help confirm a breakout from this symmetrical triangle. Still, the bulls can point to a strong RSI momentum reading, which could portend a breakout on the chart soon, but we aren't there yet.

ILF: Shares Consolidating Off the 2022 Peak, Volume On The Decline

The Bottom Line

I am a hold on ILF. The valuation is compelling, but its high exposure to cyclical sectors makes it a risky play as we head into a tough stretch for the global economy. Also, the chart shows an underperforming fund, so relative strength is soft.

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