Upgrades Not Yet Helping Mexico ETF

February 7th at 1:07pm by Tom Lydon

The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is positioned to close this week flat or with a modest loss.

That lags the 2.3% gained by the iShares Latin American 40 ETF (NYSEArca: ILF), which features an almost 28% weight to Mexico. EWW’s lethargy is disappointing considering that earlier this week Moody’s raised Mexico’s credit rating to A3, or upper medium investment grade. Mexico is Latin America’s second-largest economy behind Brazil. [Moody's Upgrades Mexico to A Status]

Mexican stocks have supporters, including J.P. Morgan. The bank believes the Moody’s upgrade could be constructive for the Mexican peso.

J.P. Morgan highlighted 10 Mexican stocks that could benefit from lower borrowing rates that come with the country’s higher credit rating, Barron’s reported. That group Wal-Mart’s Mexican unit Walmex, Mexchem (MEXCHEM-MX), Grupo Mexico (GMEXICOB-MX), Coca-Cola FEMSA (KOF), SANMEX (SANMEXB-MX), Femsa (FMX), Gap (PAC), FIBRAMQ (FIBRAMQ12-MX), Banorte (GFNORTEO-MX) and AC (AC-MX).

Assuming J.P. Morgan’s outlook is correct, that should prove to be good news for the $2.5 billion EWW. Femsa, Banorte, Walmex and Grupo Mexico  are top-10 holdings in EWW combining for nearly a quarter of the ETF’s weight.

Mexchem, Coca-Cola Femsa and AC combine for another 4.3% of EWW’s weight.

Although Mexico has been highlighted as a possible beneficiary of improving economic data in the U.S., EWW has betrayed the faith of investors viewing the country as one of the more conservatively positioned developing markets. Additionally, EWW has been a laggard relative to U.S. stocks, dispelling the notion that stocks in the two countries share a tight correlation. Last year while the S&P 500 surged, EWW traded slightly lower. [Problems for the Mexico ETF]

Interestingly, Mexico is one of just Latin American countries to have an “A” credit rating of any level. Chile is the other. Year-to-date, the iShares MSCI Chile Capped ETF (NYSEArca: ECH) is the second-worst non-leveraged ETF.

iShares MSCI Mexico Capped ETF

 

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of ILF.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.