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Leveraged Mexico ETF Garners Interest Ahead Of Rate Hike

Heading into 2018, it was widely expected that emerging markets central banks would hold off on raising interest rates. Mexico was seen as the exception.

Latin America's second-largest economy behind Brazil has held true to being one of those exceptions, raising interest rates in a bid stem further declines in the flailing peso.

What Happened

Although Mexico is an export-driven economy, the declining peso has been of no assistance to Mexican equities this year. The MSCI Mexico Index is lower by almost 6 percent year-to-date, but that decline is roughly inline with that experienced by the MSCI Emerging Markets Index.

Last Thursday, Mexico's central bank raised its benchmark lending rate to 7.75 percent, marking its second rate hike this year. Ahead of that rate hike, traders were piling into the Direxion Daily MSCI Mexico Bull 3X Shares (NYSE: MEXX).

MEXX is the only leveraged Mexico ETF trading in the U.S. The ETF attempts to deliver triple the daily returns of the MSCI Mexico IMI 25/50 Index.

Why It's Important

“Available data suggests that the world economy increased its growth rate during the second quarter of 2018,” said Banco de Mexico in a statement. “However, there are signs of divergence among the main advanced economies. In the U.S., economic activity is expected to grow at a stronger pace, partly in response to the fiscal stimulus implemented, which, under conditions of reduced slack in the economy, may lead to greater inflationary pressures.”

For the 30-day period ending June 20, the day before Banco de Mexico raised rates, MEXX averaged daily inflows of nearly $389,000, according to issuer data. That was good for one of the best inflows averages among Direxon's bullish leveraged emerging markets ETFs.

The MSCI Mexico IMI 25/50 Index allocates over 43 percent of its combined weight to the consumer staples and telecommunications sectors. Financial services and materials names combine for over 30 percent of the benchmark's weight.

What's Next

A stronger dollar and trade tensions are among the factors that could play into the near-term picture for MEXX and Mexican equities.

“Under this environment, the U.S. dollar strengthened against most currencies, while risk aversion increased worldwide,” said Banco de Mexico. “Trade-related tensions and other geopolitical factors have also contributed to these developments. All of the above has caused a reallocation of investment portfolio towards safer assets.

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