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Time to Worry about the Mexico ETF?

EWW

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Mexico is the second largest economy in Latin America and a popular vacation destination for many Americans. However, the country has begun to attract many American investors as well, thanks to its economic resilience in the latest slowdown, and its quickly growing economy.

The country has turned into something of a manufacturing powerhouse, and it has stolen share from other big emerging nations such as China. Additionally, the nation has made several moves on a political and policy front, and many believe that these ensure favorable financial conditions and economic growth for the nation’s future.

Economy Outlook

In fact, Mexico has a great potential for accelerating economic growth. In 2012 Mexico maintained a strong growth at 3.9%, while some believe that higher rates could be in the country’s future should the American economy continue to improve as well (See Why Mexico ETF is a long term Winner)

The country also represents a very large market as it ranks 8th in the emerging world, and 11th overall in terms of GDP size. To top things off, it also received a solid BBB+ rating from Fitch suggesting that the nation has a solid economic foundation, and that its reforms are well received (See Time to Buy These Top Ranked Latin America ETF)

News in Favor

Mexico’s growth prospects are attracting investment banks and investors hunting for ways to gain greater exposure to international markets. “It’s the coming of age of the Mexican market,” said Eduardo Cepeda, J.P. Morgan’s senior country officer (See Inside the Surging Mexico ETF)

The market for credit is also growing, and the banks are strongly capitalized and have complied with International Basel 3 standards. Local companies are generating cash and are looking to expand in the domestic and international markets.

The foreign manufacturers are also returning to Mexico as the country has a rich industrial base. The automakers plan to invest $10 billion in new assembly plants this year alone.

Bad News Lately

Recently the Mexican government has cut its growth outlook for 2013 to 3.1% from 3.5% after a soft first quarter. Mexico’s near-term slowdown is largely driven by short-term external factors that are likely to lose relevance in the second half of 2013.

A policy shift towards urbanization has drawn mixed results. Moreover, mixed signals from the U.S. may limit the growth outlook for Mexico. Analysts expect the central bank could cut interest rates again once a current spike in inflation subsides.

Outlook and Mexico ETF

Still, despite some of this near term gloom, the future for the Mexican economy is bright. The country is relatively correlated to the U.S.—which is a good thing now that the American economy is back on track—while it has a massive consumer base of its own, along with a booming industrial production market as well.

Given this, some long term investors may want to consider now as an attractive entry point for the Mexican economy, especially after the recent slump in equity prices. For these investors, a closer look at the Mexico ETF, described below, could be warranted:

iShares MSCI Mexico Capped Investable Market Index Fund (EWW - ETF report).

Launched in March 1996, EWW tracks the MSCI Mexico Investable Market index, which consists of stocks traded primarily on the Mexican Stock Exchange. EWW is a large blend fund with net assets of $3.1 billion and a trading volume of more than 2.6 million shares a day.

The fund holds 47 stocks in total and the top ten stocks make up 60% of the fund. EWW holds 42% giant and 38% large cap stocks with maximum exposure in the consumer staples (30%), materials (19%) and telecommunication sector (18%) sectors.

The ETF charges 52bps per year in expenses. The fund has a yield of 1.09% and has a low tracking error of .54% with its index. The product is more volatile as compared to the S&P 500, though its growth outlook is far brighter as well.

The Bottom Line

Mexico is a key emerging market that has a huge potential for growth. Recent reforms would further back the country’s strong fundamentals, attracting more investors to Mexico. This is especially true since many of these reforms are in visible sectors like services and financials. 

The main fund to play Mexico has surged over the past 12 months, but there has been significant near term weakness in the fund, like in many other emerging markets.

Still, we view this drop as a potential buying opportunity, as we are maintaining our top Zacks ETF Rank of 1 or ‘Strong Buy’ on this product, suggesting that a rebound and outperformance are in this ETF’s future, at least based on our models for the next one year time frame.

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