Where Mexico Interest Rate Might Be Headed, ETFs In Focus

Mexico’s central bank Banxico has aggressively been raising rates. In May, Governor Agustin Carstens had hiked interest rates for the sixth straight time by 25 basis points to 6.75%, which was widely unexpected by economists.

The central bank expects inflation to remain well above its target of 3% in the near future but also sees it slowing in the latter half of 2017. Most recently, Consumer Prices surged 6.16% year over year in May 2017, which was a lot more than Banxico’s target variable range of 2–4%. Stabilizing crude prices and peso is expected to bring down inflation figures (read: What's in Store for Mexico ETF as Inflation Continues to Rise?).

Mexico’s aggressive rate-hiking policy to combat President Trump’s stance on trade with the country has brought some respite to the peso. The currency is up over 18% since Trump’s inauguration. A softer stance on trade beneficial to both parties being considered has also led to gains in the Latin American currency.

Finance Minister Jose Antonio Meade said that the central bank might hike rates a couple of times more and then eye slashing rates as early as end of this year, if inflation slows to the target range. Economists widely expect Banxico to hike rates by another 25 basis points to 7% in its June meeting.

Let us discuss a few ETFs focused on providing exposure to Mexico (see all Latin American ETFs here).

iShares MSCI Mexico Capped ETF EWW

This fund focuses on providing exposure to equities of companies based out of Mexico.

EWW has AUM of $1.20 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Staples, Financials and Materials are the top three allocations of the fund, with 26.09%, 16.12% and 15.15% exposure, respectively (as of June 20, 2017). From an individual holdings perspective, America Movil L, Fomento Economico Mexicano and GPO Finance Banorte are the top three holdings of the fund, with 13.39%, 9.46% and 7.95% allocation, respectively (as of June 20, 2017). The fund has returned 19.65% year to date and 4.22% in the last one year (as of June 21, 2017). EWW currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

We will now compare the performance of EWW with a broad-based Latin American ETF, ILF.

iShares Latin America 40 ETF ILF

This fund focuses on providing exposure to Latin American equities. It tracks the S&P Latin America 40 Index.

It has AUM of $954.56 million and charges a fee of 49 basis points a year. From a geographical perspective, the fund has top exposures to Brazil, Mexico and Chile, with 54.53%, 28.45% and 11.11% allocation, respectively (as of June 20, 2017). From a sector look, Financials, Consumer Staples and Materials are the top three allocations of the fund, with 35.09%, 17.06% and 15.69% exposure, respectively (as of June 20, 2017). Itau Unibanco Holding ADR, Banco Bradesco ADR Reptg Pref SA and Ambev ADR SA are the top three holdings of the fund, with 8.81%, 6.25% and 6.08% exposure, respectively (as of June 20, 2017). The fund has returned 6.09% year to date and 12.89% in the last one year (as of June 21, 2017). It currently has a Zacks ETF Rank #3 with a High risk outlook (read: Chile Keeps Key Rates Intact: ETFs in Focus).

Below is a chart, comparing the year-to-date performance of the two funds.

Source: Yahoo (NASDAQ:AABA) Finance

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