The Mexican peso has been the worst performing currency this year. Nevertheless, investors interested in Mexico’s markets can utilize peso-hedged exchange traded funds to capture any underlying strength, without the currency risk.
The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) has declined 3.8% year-to-date. However, factoring out the depreciation in the peso, the db X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX) has returned 1.3% so far this year.
ETF investors also more options available with the recently launched iShares Currency Hedged MSCI Mexico (NYSEArca: HEWW), which also holds the same exposure as EWW but hedges rate risk with cash forwards. [iShares Unveils Massive Expansion to Currency Hedged Suite]
The peso touched an intraday low of more than 15.83 to the USD on Thursday, its lowest since the currency’s revaluation in 1993, the Financial Times reports.
As an oil exporter, Mexico’s currency has been hit by the falling crude oil prices – ETF investors should keep in mind that while Mexico has a large oil industry, none of the country-specific ETFs include exposure to the sector. Additionally, the peso may have also weakened in anticipation of the U.S. Federal Reserve’s eventual interest rate hike.
Bernd Berg, currency strategist at Société Générale, argues that the underperformance in the peso currency could continue, projecting the peso to fall toward 17 against the dollar.
“MXN remains one of the EM currencies most vulnerable to renewed stress in EM over the next month once Fed fears resurface,” Berg said.
However, Benito Berber, currency strategist at Nomura, warned that the peso could stabilize around 15.00 to 15.60 after the government’s reofrm program, notably plans to auction 14 oil and gas exploration blocks on July 15 to bolster Mexico’s assets.
Consequently, Mexico ETF investors who believe the peso can depreciate even further should take a look at the currency-hedged ETF options DBMX or HEWW. On the other hand, if the peso begins to strengthen against the U.S. dollar, the non-hedged EWW would outperform.
For more information on Mexico, visit our Mexico category.
Max Chen contributed to this article.