ETF Bears Growl South Of The Border

As has been widely documented, 2015 is turning out to be another dismal year for Latin American equities. That much is confirmed by the iShares Latin America 40 ETF ILF. ILF, which is heavy on Brazilian and Mexican stocks, is down 29 percent year-to-date.

Barring a reversal of epic proportions, ILF will finish in the red for a third consecutive year and for the fourth year in the past five. Brazilian stocks, 44.1 percent of ILF's weight, are a big reason why the Latin America ETF is lagging.

Brazil

Slack commodities demand, one of the emerging world's worst-performing currencies, widespread and highly publicized corruption scandals and Standard & Poor's recently downgrading Brazil's sovereign credit rating are among the reasons Brazilian stocks are flailing. Shares of the iShares MSCI Brazil Capped ETF EWZ are off nearly 40 percent this year and reside at their lowest levels in over a decade.

Related Link: The Crazy Week Of The Brazilian Real

However, neither Brazil, nor Peru, a country facing a potential market classification demotion, or any other major Latin American equity market is drawing bearish bets on par with Mexico, the region's second-largest economy.

Mexico

The iShares MSCI Mexico Capped ETF EWW, the only Latin America ETF trading in the US that has posted anything close to a positive performance over the past five years, is home to surging short interest.

“Short interest in BlackRock’s $1.2 billion iShares MSCI Mexico Capped ETF is at more than 40 percent of shares outstanding, compared with 13 percent at the start of May, the most among more than 1,100 exchange-traded-funds tracked by Bloomberg with at least a $300 million market cap. By that measure, traders are the most bearish on Mexican stocks since February 2009, according to data compiled by Markit,” according to Bloomberg.

EWW is down 13.6 percent this year. Over the past three years, the Mexico ETF's 17.8 percent loss looks good compared to 57.6 percent shed by EWZ and the 44.6 percent lost by ILF over that period. Mexico's economy shares ominous traits in common with its southern rival, including being pinched by slack commodities demand and a currency that has recently touched record lows against the U.S. dollar.

Chile

Since the start of the third quarter, investors have pulled nearly $91 million from EWW, more than triple the $28.3 million in assets bled by EWZ. The only Latin America single-country ETF that has added assets this quarter is the iShares MSCI Chile Capped ETF ECH.

One reason shorts are sinking their teeth into EWW is valuation. While investors keep hearing emerging markets inexpensive, that is not the case with EWW, which trades at triple the earnings multiple of the MSCI Emerging Markets Index, according to Bloomberg.