Peso Swoon Could Spell Opportunity In These Mexico ETFs

Mexican stocks, like the rest of their Latin American counterparts, have languished again this year with the iShares MSCI Mexico Capped ETF EWW sinking 7.4 percent. Dealing a blow to the theory that Mexican stocks are correlated to their U.S. peers, EWW is off 20.2 percent, putting it in a bear market, over the past year while the S&P 500 is higher by 9.5 percent over that period.

Those declines confirm that finding bottoms in EWW has been a fool's errand and a trade that has not rewarded those have embraced it. As is the case in Brazil where the tumbling real is hurting stocks, the seemingly never-ending slide of Mexico's peso is plaguing equities in Latin America's second-largest economy. Earlier Thursday, Mexico's currency fell to a record low against the dollar.

“The world’s eighth-most-traded currency was swept up in an emerging-market sell-off Thursday as U.S. economic data supported the case for higher interest rates from the Federal Reserve. The plunge has continued even as the central bank tried to slow its descent with $52 million of daily dollar sales in addition to the extraordinary auctions, which happen when the peso is unusually volatile,” according to Bloomberg. 

For investors that are willing to devote some time to monitoring EWW for a possible rebound, there might be better ways to plan for a bounce in Mexican stocks: Currency hedged ETFs, namely the Deutsche X-trackers MSCI Mexico Hedged Equity ETF DBMX and the newly-minted iShares Currency Hedged MSCI Mexico ETF HEWW.

Some housekeeping: First, over a year's worth of price action in EWW, the largest Mexico ETF, paints a clear but grim picture of Mexican equities.

There are some reasons to believe that DBMX and HEWW have the potential to one day have some moments in the limelight. Emphasis on “potential” and “one day.” For example, currency hedged ETFs are hot and 2015 has brought the first signs of investors embracing ex-Japan single-country currency hedged funds. 

Currency hedged country-specific ETFs tracking German and South Korean stocks have seen exponential asset growth this year, so it possible that if Mexican stocks bounce, DBMX and HEWW will capture new assets. The potential allure of peso hedged ETFs increases when acknowledging Mexico's central bank has, thus far, been rendered impotent in stemming the peso's slide.