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Mexico Catching Up To Brazil; ETF Investors Don't Care

ETF Professor

Stung by sliding commodities demand and the tumbling real, among other factors, Brazil's stock market is in shambles. Shambles highlighted, for U.S. investors, by a year-to-date plunge of 34.5 percent for the iShares MSCI Brazil Capped ETF (NYSE: EWZ), the largest exchange traded fund tracking Brazilian stocks.

The beating incurred by the Bovespa, Brazil's benchmark equity index, is so severe that Latin America's largest economy is in danger of losing the title of home to the region's largest equity to rival Mexico.

“Brazil’s market capitalization has contracted 34 percent this year to $531 billion, while in Mexico the market has shrunk 11 percent to $397 billion. That’s left Brazilian stock capitalization at 1.3 times that of Mexico’s, down from 3.8 times as recently as May 2011,” according to Bloomberg.

ETF investors are not overwhelmed by the thought of Mexico closing in on Brazil for the honor Latin America's largest equity market. After all, the iShares MSCI Mexico Capped ETF (NYSE: EWW) is off 12.7 percent this year.

Related Link: Brazilian Real Hits Its Lowest Point Since 2002; Rousseff Assures Fiscal Deficit Is 'Temporary'

Mexico's economy, Latin America's second-largest behind Brazil, 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.

ETF investors have shown universal distaste this year for EWW and EWZ, pulling $935 million and almost $907 million, respectively, from the funds. No other single-country stocks tracking stocks in a Latin American nation has lost more than $41.4 million this year.

Although both ETFs are bleeding assets, as the Mexican stock market is closing in on Brazil's in terms of market cap heft, EWW is doing the same with EWZ regarding assets under management. About two years ago, EWZ was home to $6 billion in assets under management, more than double the total found in EWW at the time. As of Sept. 2, EWW had $1.22 billion in assets under management compared to $1.91 billion for EWZ, according to iShares data.

Outflows from other Brazil and Mexico ETFs have not been so severe. For example, the Deutsche X-trackers MSCI Mexico Hedged Equity ETF (NYSE: DBMX) has seen slight inflows this year while the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (NYSE: DBBR) has lost just $3.2 million. Those currency hedged ETFs have also been significantly less bad than their unhedged rivals.

DBMX is down less than 12 percent year-to-date while DBBR is down 28.3 percent, performances that cement the notion that currency hedging works with emerging as well as developed markets.

Image credit: iivangm, Flickr

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