The ETF world is riding high on growth both in terms of assets and total number of funds. Issuers are hardly leaving any corner of the investing world. While a number of active and smart products hit the market in the past few months, some returned to the basics and focused on key investing areas that are currently compelling in valuation.

Probably, with this intension of tapping the key investment areas, Recon Capital has targeted an unloved investing arena, i.e., Latin America, but with a certain twist. Recon Capital has chosen the high dividend stocks in the Latin American space. Let’s dive a little a deeper and find out if the proposed product has the potential to outdo the space, upon getting approval.

Proposed fund in focus

 The fund looks to track the BullMark LatAm Select Leaders Index. As per the fund’s investment strategy, the Latin American stocks will be screened to filter out high dividend yielding securities to form a dividend-weighted investment portfolio (read: Dividend ETFs Explained: What Investors Need to Know).

The Index focuses on stocks from Brazil, Mexico, Chile, Peru and Columbia. However, the fund does not cap any single country weight. In fact, stocks from just one Latin American nation can form the entire basket. Currently, the index holds 33 stocks. The fund will charge 70 bps in fees.

How does it fit in a portfolio?
 
The new product appears an interesting choice for investors seeking exposure to Latin American high dividend paying stocks in the present low interest rate environment. The fund’s strategy of focusing on high-yielding stocks is noteworthy especially given the choppy performance of the Latin American markets (read: 3 Excellent Dividend ETFs for Growth and Income).

Notably, foreign investors park their money in the riskier emerging market bloc for higher yields. For example Brazil’s real cost of borrowing is among the highest in the world. This might attract yield-hungry investors to Brazil despite the fast-deteriorating fundamentals of the economy.

Otherwise, Latin American economies are rich in commodities. Investors should note that commodities are out of favor at present which is wrecking havoc on the Latin American currencies. In such a situation, dividend appears to be the last resort to lure investors toward this ailing zone. Moreover, dividend paying companies are generally considered stable and more mature with solid cash flows and thus provide greater stability.

Can it Succeed?

Since the fund is tilted toward dividend yield, we expect Brazil to garner considerable share of the basket. In that case, several Brazil-focused ETFs could pose threats to the proposed fund.

MSCI Brazil Hedged Equity Fund (DBBR) yielding around 29.84% and Market Vectors Brazil Small-Cap ETF (BRF - ETF report) yielding 7.01% are some of the potential competitors in the Brazilian space. Other possible peers are db X-trackers MSCI Mexico Hedged Equity Fund (DBMX) yielding 12.89% and InterBolsa FTSE Colombia 20 ETF(GXG) yielding over 5%.

Broader Latin American products like Latin America AlphaDEX Fund (FLN), SPDR S&P Emerging Latin America ETF (GML) and MSCI Emerging Markets Latin America Index Fund (EEML - ETF report) can also give the newly filed ETF a run for investors’ money.

Several of the afore-mentioned ETFs charge lesser than the newly filed ETF. So, it will have to offer investors a substantial dividend yield which can make up for its higher charges.

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