Argentina ETF Drops On Sovereign Default

Argentina defaulted on its debt for the second time in 12 years after last-ditch negotiations with creditors failed to secure a deal to save the embattled country’s finances. 

Latin America’s third largest economy could face additional trouble in the future if creditors force an accelerated time table for repayment of their bonds.

This news hit the Global X FTSE Argentina 20 ETF ARGT hard on Thursday, as the fund fell more than 5 percent in early trading. Trading volume on ARGT also spiked above the 90-day average as well. 

This ETF represents the 20 largest and most liquid companies that participate directly in the Argentine economy. The underlying index is market cap weighted to give the largest companies the biggest pull within the portfolio.

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ARGT has total assets of more than $35 million and charges a net expense ratio of 0.75 percent. Prior to the rumors of this credit event, ARGT appeared to be on pace to significantly outperform a broad-basket of Latin American companies.

Through June 30, ARGT had gained 13.34 percent in 2014. That performance significantly beats the diversified iShares Latin America 40 ETF ILF, which gained just 4.30 percent over the same time period.

Based on this outperformance and significant public exposure during the World Cup sporting event, ARGT has had net inflows of over $25 million in 2014. However, that tide may turn with negative sentiment toward the country’s fragile economic state. Other ETFs that were adversely affected by this news include the iShares JP Morgan USD Emerging Market Bond ETF EMB. This dedicated sovereign bond ETF has approximately 2.4 percent of its $5 billion portfolio allocated to Argentina credit.

Emerging market bonds have rebounded significantly from the volatility they experienced in 2013 and overcame concerns of geo-political risk in Russia as well. However, this latest credit event will test the resolve of foreign bond holders moving forward. 

Note: Author owns EMB at the time this article was published.