A Mess for the Mexico ETF

Underscoring just how poorly Latin American equities have performed this year, three of the 10 worst non-leveraged exchange traded funds on a year-to-date basis are single-country ETFs tracking stocks in Latin American economies.

With a 2015 loss of 4.9%, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is not one of the 10 worst non-leveraged ETFs and the lone Mexico ETF’s decline is only half as bad as that of theiShares Latin American 40 ETF (NYSEArca: ILF). On the other hand, EWW’s 2015 performance has been nearly twice as bad as that of the MSCI Emerging Markets Index.

Although Mexico is not a member of the Organization of Petroleum Exporting Countries (OPEC) and despite the fact that EWW has no direct energy sector exposure, falling oil prices have taken a toll on Mexican stocks because the country is one of Latin America’s largest oil producers. Oil accounts for 13 percent of Mexico’s exports and a third of budget revenues, according to Reuters.

Finance Minister Luis Videgaray warned that low oil prices could force the government to keep tightening fiscal policies after a spending cut announced in January. Mexico’s economy is expected to expand a downwardly revised 3.08% this year, compared to an estimated 3.29% a month ago and 3.85% in August, reports Bredan Case for Bloomberg. [Oil Prices Weigh on Mexico ETF]

Falling oil prices arrived just months after Mexico sparked excitement across the energy industry by announcing reforms that would open the country’s energy business to foreign investment for the first time in decades.

The combination of low oil prices and a weak peso has pressured Mexican stocks and EWW. The peso has fallen by more than 18% against the dollar over the past year, a decline that has highlighted the advantages of the oft-overlooked Deutsche X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX). DBMX, which hedges against a depreciating peso, is down less than 2% this year.[Currency Hedged Craze Just Starting]