Argentina ETF: Investors Fear Government Intervention

NEW YORK (ETF Digest) -- Last week, the Merval, Argentina's benchmark stock index, finished slightly down amid a growing clash between the Argentine government and YPF SA, the largest oil and gas company in Argentina. While the Global X FTSE Argentina 20 ETF (ARGT) was slightly up last week, the dispute has investors rattled.

The conflict centers on an Argentine government request that YPF SA reinvest its last two years' earnings in production and exploration rather than pay dividends to stockholders. The majority Spanish-owned company has been the target of mounting criticism by Argentine government officials, not least of whom President Cristina Kirchner, for failing to boost production.

Argentina, once a net oil and natural gas exporter, has experienced a steep decline in oil production since 1999 with a precipitous 32% fall since 1998. This has necessitated growing petroleum imports which erased as much as $5 billion from Argentina's trade surplus last year.

The escalating dispute with YPF SA took a dramatic turn on Sunday when the Patagonian province of Chubut stripped the company of two of its oil field concessions, claiming it had failed to fulfill investment promises. The move has investors wondering if nationalization could be a possibility in the future, and has further strained relations between Argentina and Spain. Repsol, which owns 57.43% of YPF, is one of Spain's largest companies.

YPF SA is the second largest holding in ARGT after Tenaris SA (22.1%), with a 9.6% allocation, and the fund has a high 0.75% expense ratio.

Any further major move against YPF by the Argentine government is likely to have a significant effect not just on YPF SA or ARGT, but on the investment climate as a whole in Argentina.

Both ARGT and YPF are down, but YPF has fallen as much as 15% on growing investor fear of a government intervention.

Compare the iShares MSCI Emerging Markets Index Fund (EEM) [in blue] to Global X FTSE Argentina 20 ETF (ARGT) [in red]. ARGT closely follows EEM until ARGT diverges sharply downward in early 2012.

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