Mexico ETF Rises After Surprise Rate Cut

Shares of the iShares MSCI Mexico Capped Investable Market Index Fund (EWW) are trading higher by nearly half a percent today after Banco de Mexico, that country's central bank, surprisingly pared its overnight lending rate by 50 basis points to a record low of four percent.

It is the first time in three and a half years that the central bank has pared rates, a move that was expected by just seven of 25 economists surveyed by Bloomberg.

Benign inflation served as one catalyst for Banco de Mexico to pare rates. Inflation in Latin America's second-largest economy was 3.55 percent last month, up from 3.25 percent in January though still within the central bank's desired target range of two percent to four percent, Bloomberg reported.

Slowing economic growth is perhaps the other primary catalyst behind the rate as Mexico's GDP growth is forecast to be 3.5 percent this year, though that is expected to be on par with Brazil, Latin America's largest economy.

Still, EWW has been a leader among major Latin America ETFs over the past year and year-to-date. In the past 12 months while the iShares S&P Latin America 40 Index Fund (ILF) has slid 7.6 percent, EWW has surged 19.6. Over the same time, EWW has been the top-performing country-specific ETF tracking a Latin American nation.

Buoyed by government labor reforms and the pilfering of some manufacturing jobs from China, EWW has been a solid though not spectacular performer in 2013. The ETF has outperformed ILF and the comparable Colombia and Peru ETFs, though EWW is currently lagging the iShares MSCI Brazil Capped Index Fund (EWZ).

To be fair, EWZ has only started outpacing EWW this week by virtue of a resurgence in Brazil's state-run oil giant Petrobras (PBR).

EWW's uptrend does have the ETF trading at a premium relative to the broader emerging markets universe. The fund currently has a P/E ratio of 26.34 and a price-to-book ratio of 3.83, according to iShares data. By comparison, the iShares MSCI Emerging Markets Index Fund (EEM) has a P/E below 18.4 and a price-to-book ratio just over three.

Departing from equities, news of the rate cut is not having much of an impact on bond ETFs with heavy exposure to peso-denominated issues. The peso gained more than eight percent against the greenback last year and is up nearly one percent year-to-date, underscoring why some investors, including PIMCO's Bill Gross favor peso-denominated bonds.

Today, however, the Market Vectors LatAm Aggregate Bond ET (BONO), which has a14.5 percent weight to bonds denominated pesos, is just slightly lower. Same goes for the Emerging Markets Local Currency Bond ETF (EMLC), which features a 10 percent weight to Mexico.

By The ETF Professor