As some emerging markets ETFs start to rebound from dismal first-half performances, an old leader could be worth getting reacquainted with. The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) has already notched an impressive rebound, jumping from just over $57 in mid-June to Thursday’s close at $66.71.
Unable to escape the emerging markets carnage that proved particularly troublesome for ETFs tracking Latin American nations, EWW is still saddled with a year-to-date loss of 7.2%. Still, that is significantly less bad than what the comparable Brazil and Chile ETFs have subjected investors to. Over the past year, EWW has traded higher, cementing its status as a LatAm leader during a time when the equivalent Brazil, Chile and Peru ETFs have all plunged. [Brazil ETFs: Time to Get In?]
One advantage offered by EWW is that although the fund is not currency-hedged, the Mexican peso is rebounding. The peso is hit a 11-month low on June 20, but it has since appreciated 4% against the U.S. dollar. The peso is the only free-floating emerging markets currency that has shown any signs of strength against the greenback this year. [Emerging Markets Currency ETF Perks Up]
In the past, investors embraced EWW on the perception that it was less volatile than other emerging markets ETFs. Many funds that track developing economies are heavy on financial services, energy and/or materials names. While materials and financials combine for almost 32% of EWW’s weight, those sectors are overshadowed by the ETF’s combined 45% weight to consumer staples and telecom names.
There are two issues prospective EWW investors must be aware of. First is the association of staples, telecom and dividends. U.S. investors are accustomed to getting decent yields from those sectors, but EWW’s trailing 12-month yield is less than 1%. Second, playing defense in Mexico means the same thing as it can in the U.S.: Paying up for the privilege. U.S. staples are often viewed as expensive relative to other sectors. Likewise, EWW, at a time when plenty of folks are talking about how cheap emerging markets are has a P/E of 27.1. That is far pricier than the MSCI Emerging Markets Index.
Still, some investors see opportunity south of the border. “Mexico is a well-loved child and as soon as volatility calms down, investors will jump back in the market,” said Benjamin Brodsky, global head of fixed income asset allocation and emerging markets at BlackRock, according to the Wall Street Journal.