Mexico ETFs in Focus After Ratings Upgrade

The iShares MSCI Mexico Capped Investable Market Index Fund EWW, along with other ETFs with significant exposure to Latin America's second-largest economy, should be in focus today after Fitch Ratings boosted Mexico's credit rating to BBB+ from BBB. The Fitch rating, the third-lowest in investment-grade territory, is comparable to Moody's Investors Service's Baa1 rating. Fitch's move follows Standard & Poor's raising its outlook on its BBB rating of Mexico in March. Not surprisingly, Fitch cited legal and tax reforms being pushed by Mexican President Enrique Pena Nieto as a prime reason for its upgrade. The idea of those reforms, which include labor legislation that has helped Mexico pilfer manufacturing jobs from China has had a meaningful impact on EWW. In the past six months, the ETF has gained 11.5 percent, better than triple the gains of the iShares MSCI Brazil Capped Index Fund EWZ. Investors have taken notice. On November 15, 2012, EWW had $1.4 billion in assets under management. As of May 8, that number had almost tripled to $3.16 billion, according to iShares data. Amid expectations for slower growth, Banco de Mexico surprisingly lowered interest rates by 50 basis points to four percent in March. However, central bank Governor Agustin Carstens said growth could reach 6.5 percent in the future on the back of the labor and legal reforms. Bonds The impact of the Fitch ratings increase on Mexican government bonds, a favorite of PIMCO's Bill Gross, remains to be seen. Mexican 10-years had a yield of 2.52 percent, a 71-basis point premium to the comparable U.S. Treasurys, as of Wednesday's close, according to Bloomberg data. That is well below the emerging markets average yield of 4.56 percent seen on sovereign debt just a month ago. Still, investors have found Mexican sovereigns to be a compelling asset class and it is one that can be accessed through several ETFs. The Market Vectors LatAm Aggregate Bond ETF BONO allocates 26 percent of its weight to Mexico. Additionally, five of BONO's top-10 holdings are Mexican issues and 15.6 percent of the ETF's weight is denominated in Mexican pesos. BONO has grown impressively this year from $26.1 million in AUM in January to $47.6 million as of May 8. The ETF has a 30-day SEC yield of 4.41 percent and an effective duration of 6.31 years. Another Market Vectors fund, the $1.5 billion Market Vectors Emerging Markets Local Currency Bond ETF EMLC features a 6.2 percent weight to Mexico with a 30-day SEC yield of 4.46 percent. EMLC's effective duration is 4.99 years. Among local currency bond ETFs, the SPDR Barclays Emerging Markets Local Bond ETF EBND does not grab a lot of press. However, EBND is not small with almost $165 million in AUM and offers decent exposure to Mexico with a 9.53 percent weight to the country. EBND has a 30-day SEC yield of 4.43 percent and a modified adjusted duration of 5.07 years, according to State Street data. For more on ETFs, click here.