ETF Trends
ETF Trends

The Mexico country-specific exchange traded fund has been among some of the best emerging market performers this year, surging on a quickly appreciating Mexican peso as the U.S. dollar weakened against a basket of international currencies.

The iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest exchange traded fund dedicated to Mexican equities,jumped 30.2% year-to-date, compared to the 11.8% gain in the S&P 500.

Alan Alanis, Latin America equity strategist at UBS, attributes the surge to three defining factors: a weaker dollar, diminishing concern over U.S.-Mexico trade relations and better-than-expected economic growth from Mexico, reports Fred Imbert for CNBC.

“The first, and by far the most important one, is currency. The Mexican peso went from being the worst-performing currency against the dollar to being the best-performer in 2017,” Alanis told CNBC. “Of the 30 percent gains in the EWW, two-thirds of those are currency-related.”

The U.S. dollar has depreciated 14.3% against the Mexican peso year-to-date to MXN17.78.

EWW tries to reflect the performance of the MSCI Mexico IMI 25/50 Index, which does not hedge its currency risks. Consequently, a strengthening peso has translated to an improved U.S.-dollar denominated return for EWW investors.

The Mexican peso was pressured for the later part of the U.S. presidential election and throughout the first few months following President Donald Trump’s victory because of Trump’s promises during the campaign trail to build a wall across the southern border, crack down on immigration and renegotiate the North American Free Trade Agreement, which all contributed to risk-off sentiment concerning Mexican assets.

Related: Largest Mexico ETF Continues Impressive Performance

However, speculation of a U.S.-Mexico trade war has diminished. Last month, the U.S. and Mexico reached an accord to end disputes over the sugar trade between the two countries. Moreover, the two, along with Canada, are expected to start talks over NAFTA next month.

Meanwhile, the Mexican economy has been doing better-than-expected in light of the threat of a trade war and a quickly depreciating currency. Mexico’s economy expanded 2.6% in the first quarter year-over-year.

“It’s not spectacular growth, but it’s better than people expected,” Alberto Ramos, head of Latin American Economics at Goldman Sachs, told CNBC. “Towards the end of last year, the consensus was the [Mexican] economy would decelerate a lot, with consensus around the 1 percent handle. Now the consensus has increased and is closer to 2 percent.”

For more information on the Mexican markets, visit our Mexico category.