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Inside the Surging Mexico ETF

EWW ILF

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Mexico, the second largest economy of Latin America, turned out to be one of the strongest economies in 2012. This was largely attributable to strength in domestic consumption, a good level of foreign direct investment, improvement in trade with the U.S. and a strong banking system.

On the back of its strong fundamentals, the Mexican economy is making a case for the best market to be in for all of Latin America. And, thanks to competitive manufacturing cost, an open economy, and a low debt level at both private and public sectors, the country could be well poised for future growth (Forget Brazil; Mexico ETF is Hot).

The economic strength in Mexico is reinforced by growth in the employment level as the jobless rate reached its lowest point in four years. The level of unemployment slumped to just 4.5% in January.  

These positive trends are expected to continue through 2013. FDI is further expected to show momentum, along with the domestic economy and international trade gaining strength. Moreover, a strong manufacturing sector and favorable demographics should fuel economic growth going forward (Forget China, Buy These Emerging Market ETFs Instead).

It should also be noted that the economic prospects in the U.S. are closely tied to Mexico’s economic development. The economy exports as much as 80% of its goods to the U.S. while imports from the U.S. account for almost 50% of the total.

Now, with the U.S. economy showing signs of recovery and gaining momentum, the trade relationship between the countries should further gain strength in 2013.

On the inflation front, the economy has experienced a break in its four-month easing streak. In February, however, inflation increased 0.49% while on an annual basis it came in at 3.55% compared with 3.25% in January.

Conversely, what came as a surprise is the central bank’s initiative to cut interest rates thereby bringing it to a new low level. The central bank of Mexico had cut its rates by 0.5% to 4%.

This is the central bank’s first attempt to cut interest rates in four years. The move is seen as a play to further strengthen the Mexican economy and does not indicate initiation of any monetary easing policy as indicated by the bank (Best Latin America ETFs for 2013 (Part I): Mexico).

Additionally, the central bank said inflation is expected to tick up further in the coming months to 4% before falling back to around 3% by the second half of the year. It is then seen to be holding around that level next year.

Overall, events are shaping up quite nicely for the Mexican economy, suggesting a look to their equities may not be a bad idea. And since the country is so dependent on America, it can be thought of as a high beta bet on the domestic market as well.

For these reasons, a look to the Mexico ETF might be a great idea. The main way to target the country in ETF form is via the iShares MSCI Mexico Capped Investable Market Index Fund (EWW).

EWW tracks the MSCI Mexico Investable Market index which consists of stocks traded primarily on the Mexican Stock Exchange. The index is a capitalization weighted index that aims to capture 99% of the total market capitalization in the nation.

Launched in March 1996, the fund now has more than $1.2 billion in AUM and appears to be one of the popular choices among investors as indicated by its trading volume of more than 2 million shares a day (4 Best ETF Strategies for 2013).

The assets are invested in 46 holdings with an average market cap of $30.33 billion. Among individual holdings, America Movil appears to be dominating the performance of the ETF as indicated by its allocation level of 17% in the ETF. Among others, the fund does not invest more than 9.24%.

However, the fund appears to have a concentrated holding pattern in its top ten choices of companies. Investment in the ten holdings stands at 63.3%.

Among sector allocation, the fund appears to have done a good job in spreading the asset base. Consumer staples (30%), materials (19.2%) and telecom (17.3%) are the top sectors that the fund is invested in. Financials and Industrials also get double-digit allocation in the fund.

Growing consumer demand in the country suggests that the fund will benefit from its heavy exposure to consumer staples and telecom sectors.

The fund charges 51 basis points per year in expenses and currently has a 30-say SEC yield of 1.28%.

The fund was one of the best performing emerging market ETFs in 2012 delivering a gain of 31.25% while it moved higher on the central bank news, and is up in 2013 as well (A Trio of Top Emerging Market ETFs for 2013).

Bottom Line

The Mexican economy continues to perform well and it has some solid fundamentals supporting its outlook. Fortunately, the market can be easily played in ETF form, EWW, giving investors an easy choice for broad Mexican exposure.

While the fund has surged over the past 12 months, the trend could definitely continue for quite some time. That is why we currently have a Zacks ETF Rank of 1 or ‘Strong Buy’ on this product, suggesting that outperformance is in this ETF’s future, at least over the next one year period.

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