Mexico ETF Could Reward Patient Investors

There are at least six recognizable single-country exchange-traded funds dedicated to large caps in Latin America. Of those six ETFs, five are dishing out stellar performances this year, with the iShares MSCI Mexico Inv. Mt. Idx. (ETF) EWW looking like a laggard with a year-to-date gain of just 3.7 percent.

The comparable Peru ETF's year-to-date showing is about 20 times superior to EWW's while the largest Brazil ETF is outpacing the Mexico fund by a factor of better than 16-to-1. The iShares S&P Latin America 40 Index (ETF) ILF, of which Mexico is the second-largest country allocation behind Brazil, is higher by nearly 32 percent.

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So, with the benefit of hindsight, investors now know that they could have picked essentially any Latin America ETF that is not EWW at the start of the year and they would have ended up doing much better for it.

That does not mean investors should be dismissive of EWW and opportunities in Mexico, Latin America's second-largest economy behind Brazil.

Don't Dismiss Mexico So Quickly

Mexico “is closely connected to the United States, which is still one of the strongest performing DM economies and whose manufacturing data has remained in expansion this year, according to Bloomberg data,” said BlackRock in a recent note.

However, investors have been resisting the temptation of EWW with a prime reason being valuation. While investors keep hearing how inexpensive emerging markets are, that is not the case with EWW, which trades at triple the earnings multiple of the MSCI Emerging Markets Index.

Although Mexico is a major commodities producer, EWW's direct exposure to commodities is not as high as other Latin America ETFs. Sure, the materials sector is 14 percent of EWW's lineup, but the Mexico ETF is more defensively positioned with a combined weight of 39 percent to defensive consumer staples and telecom names, leading to an earnings multiple that is often higher than traditional emerging markets benchmarks.

“The U.S. dollar weakness, which we expect could continue, is a positive. The stabilization in oil prices (despite some selling after the vote) has also been a tailwind, given Mexico’s major exports are crude oil and vehicles. And let’s not forget, the country has been making some progress with reforms. Taken together, our long-term outlook for Mexican assets is positive,” added BlackRock.

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