Mexican ETFs in Focus for Cinco de Mayo


Cinco de Mayo, Spanish for ‘fifth of May’, is a holiday that looks commemorate Mexico’s victory over the French in the Battle of Puebla. The victory by the Mexicans was a big surprise, as many expected the French to make short work of the Mexicans and easily drive on to Mexico City (though it should be noted that France eventually did beat Mexico and briefly install an Emperor).

Today, Cinco de Mayo is a time to celebrate all things Mexico, and given all the recent news coming out of the country, it is also a great time to take a closer look at the Mexican economy as well.

Mexican Economy in Focus

Mexico has long been considered a low-cost manufacturing destination, and a budding rival to behemoths like China or Vietnam. However, a recent study by the Boston Consulting Group showed just how far Mexico has come in terms of being a big player on the manufacturing stage (see all the Latin American Equity ETFs here).

The survey showed that Mexico now has lower average manufacturing costs than China, driven by productivity gains and steady exchange rates. And if energy prices remain high or if wage inflation in China becomes a big problem, the cost advantage for Mexico could definitely increase, suggesting that the country will remain a destination for those seeking to add manufacturing capacity for years to come.

Furthermore, Mexico is also making great strides in terms of liberalizing its extremely important energy sector. The country recently outlined a number of market-friendly proposals to open up the nation’s vast oil and gas industry to competition, hopefully drawing a huge amount of investment in short order.

If these proposals are passed, it will be the first time since 1938 that Mexico’s energy sector will be open to outsiders, a situation which could attract considerable amount of interest from oil majors around the globe (see 7 ETFs to Buy in 2014).

The plan could also boost Mexican tax receipts too, as the country is looking to increase oil production by 40% by 2025, and with a 10% royalty when oil is at $100/bbl., this could act as a huge catalyst for Mexico (though obviously new projects will need to be up and running to make up for the coming lower tax rate and production levels from Penmex).

Clearly, Mexico is making some great strides and its economy may also be primed to see gains in the months and years ahead. This may be particularly true if the energy sector sees a huge boost from the liberalization plan, or if developed markets like the U.S. remain strong and thus continue to demand goods produced in Mexico.

Mexican ETFs

While there are a few Mexican stocks that trade in the U.S., there are two Mexican ETFs as well. These funds might be great picks given the recent positive news out of the country, or at least definitely worth a closer look by investors should these catalysts continue to boost the prospects of the increasingly dynamic Mexican economy:

iShares MSCI Mexico Capped ETF (EWW)

This is the most popular Mexico ETF trading in the U.S., and the oldest too, as it has been on the market since 1996. The fund also sees great volume in excess of three million shares a day, so bid ask spreads should be relatively tight in this product (read Is the Mexico ETF A Better Play on Latin America?).

The fund has just over 50 stocks in its basket, with a big weighting to top component America Movil which makes up just over 16.3% of the total assets. This helps telecoms take the second biggest allocation in the fund at 17%, edging out basic materials (16%) and financials (15%), and just being edged by consumer staples at 22%.

EWW has had a rough 2014, as it has underperformed the S&P 500 and it is in the red YTD. However, given some of the longer term positive catalysts that we described above, the fund could return to form later this year, and especially if appetite for emerging market ETFs comes back.

db X-trackers MSCI Mexico Hedged Equity Fund (DBMX)

This ETF is the newcomer on the Mexico ETF block, as it made its debut earlier this year. The fund hasn’t really seen a surge in popularity though, as it still sees volume below 10,000 shares a day and a small asset base.

The holdings for DBMX are pretty much identical to EWW, and this probably isn’t helping the fund build up assets. America Movil is again the top spot, while consumer staples, telecoms, basic materials, and financials make up the top four sectors, each accounting for at least 15% of assets (see 3 More Hedged ETFs Hit the Market from Deutsche Bank).

The real difference between this fund and EWW is the currency hedging, as DBMX looks to strip out the impact of the Mexican peso on the fund’s returns. So when the peso is weak, this ETF could outperform its more popular counterpart, though it does look to lag when the peso is strengthening.

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Read the analyst report on EWW

Read the analyst report on DBMX

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