Checking Out Steamy Funds South of the Border

In response to both political stability and pricing pressure, Landers raised his weightings on Brazil's largest commodity producers, Petroleo Brasileiro(PBR Quote) (10%) and iron ore exporter Companhia Vale do Rio Doce(RIO Quote) (9%).

Not that these two stocks were hidden gems. When it comes to Latin American funds, stock selection is curtailed by serious benchmark and liquidity constraints.

"There are not too many choices as to where you can go," says Healy. "To a certain extent it's all about how much Petrobras you have." Petrobras accounts for about 11.8% of the MSCI Latin American Index (combining NYSE-listed ADRs with Brazilian Bovespa-listed shares).

When reviewing the Latin American funds available -- and there aren't that many -- it's tough to dispute Healy's point. (FLATX Quote)Fidelity, (PRLAX Quote)T. Rowe Price and (MILAX Quote)Morgan Stanley each offer Latin American funds comprising nearly identical stock selections with different weightings.

The overlap provides for a narrow range of returns, thus leading Healy to wonder why they need to be so pricey. Merrill's fund, for example, has a front-end load of 5.25% and an above-average expense ratio of 2.10%.

Fee-conscious investors looking south of the border might take a look at the iShares S&P Latin America 40 Index ETF(ILF Quote). It trades like a stock, so the only expenses it requires are commission fees and a minimal expense ratio of 0.50%. ILF shares returned 60% last year, compared with Landers' fund-leading 68%, so you can see how tightly Latin American funds hug their respective benchmarks.

Investors looking to dive directly into the Brazilian markets can purchase the iShares MSCI Brazil Index(EWZ Quote), but they should do so with caution. It's tough to dollar cost average, as you might want to do in a volatile fund. The Brazil ETF was up 114% last year.

If the greater Latin American ILF returned 61% and the Brazil Indexed EWZ returned nearly double that, which countries were slowing down the growth?

Players MSCI EMF Latin America, top holdings
Security	Country	Weight	Ticker	Listing
TELEFONOS MEXICO L	MX	7.5727%	TMX	NYSE (ADR)
AMERICA MOVIL L	MX	6.6298	AMX	NYSE (ADR)
PETROBRAS PN	BR	6.5646		Bovespa Listing
PETROBRAS ON	BR	5.2471	PBR	NYSE (ADR)
VALE DO RIO DOCE PNA	BR	4.4595		Bovespa Listing
CEMEX CPO	MX	3.9533	CX	NYSE (ADR)
VALE DO RIO DOCE ON	BR	3.6356	RIO	NYSE (ADR)
AMBEV PN	BR	3.6194		Bovespa Listing
BANCO ITAU HLDG FIN. PN	BR	2.9989	ITU	NYSE (ADR)
GRUPO TELEVISA CPO	MX	2.7045	TV	NYSE (ADR)
Source: MSCI