A Closer Look at Mexico ETF

Jun.20.10 | About: iShares MSCI (EWW)

By Cathy Carlson

Over the last several years, the developing economies of the world have emerged as the leaders in the global recovery effort. With GDP growth rates in developed markets close to zero, interest in emerging markets has surged. Most US investors who have begun tilting the equity component of their portfolios towards emerging markets focus on the BRIC economies (Brazil, Russia, India, and China). But there is another interesting emerging market economy just south of the border, one that is accessible through the iShares MSCI Mexico Investable Market Index Fund (NYSEARCA:EWW).

Cautionary Tale

When Rio de Janeiro was awarded the 2016 Olympics last year, Brazilians rejoiced on hopes that the country would follow in the footsteps of South Korea, using the global spotlight to catapult the economy towards developed status. But Mexico serves as a cautionary tale that the Olympics do not guarantee economic prosperity; more than 40 years after Mexico City hosted the summer games, the country is plagued by drug-related violence, frequent kidnappings, and other horrors that scare off tourists and foreign investors.

Drug and gang violence, driven in part by the demand for illegal drugs in America, has caused more than 20,000 deaths since 2006; Finance Minister Ernesto Cordero maintains that drug wars have caused Mexico’s economic growth to decrease by about 1% annually. Mexico’s President Felipe Calderon recently pleaded for help during a visit to President Barack Obama, telling lawmakers that “there is one area where Mexico needs your help, that is stopping the flow of assault weapons and other deadly weapons across the border.”

Mexico’s disproportionate allotment of income has created one of the largest “wealth gaps” in the world; telecommunications tycoon Carlos Slim is the world’s richest man, residing in a country where 47% of the population is living under the asset-based poverty line. The top 10% of earners receive more than 35% of total income assets, while the lowest 10% receive less than 2%. Although over 40 million people in Mexico are living in poverty, the unemployment rate is surprisingly low. At about 5.5%, Mexico’s jobless rate is far below the US, although by some estimates underemployment in the country is as high as 25%.

Brighter Days Ahead?

Despite the well-publicized headwinds presented by drug violence, Mexico’s economy expanded by 4.3% in the first quarter of 2009. Some analysts estimate that that figure could be as much as 1.5% higher if drug-related violence could be controlled. Mexico is beginning to recover from its worst contraction in almost 80 years; the economy shrunk by 6.5% last year as US demand for exports plummeted. Mexico’s central bank is now forecasting that the economy could grow by as much as 5% this year, and foreign direct investment could top $20 billion.

Mexico is considered to be one of the world’s most open economies; the country has established free trade agreements that have removed trade barriers from more than 40 countries, including the European Union, US, and Canada. Though the country has diversified its trade partners, more than a quarter of Mexico’s GDP is derived from exporting to the US, meaning that the fates of the two economies are clearly linked. Last year, that dependence on US exports, along with swine flu concerns, big reductions in tourism, and drug trade violence, caused Mexico’s GDP to drop to $876 billion, a significant decline from 2008 GDP of $1.088 trillion. But a significant portion of that loss is expected to be reclaimed this year; Cordero recently said in an interview that industrial production, manufacturing, and car sales are all pointing towards better-than-expected economic expansion.

Mexico ETF Options

As the second largest economy in Latin America, Mexican equities receive moderate allocations in diversified Latin America ETFs There is also an ETF offering pure play exposure ot the Mexican economy; the iShares MSCI Mexico Investable Market Index Fund (EWW) tracks the performance of the MSCI Mexico Investable Market Index. EWW is heavily weighted towards the telecom sector (36%), including holdings in Carlos Slim’s telecom giants Telmex (TII) and America Movil (NYSE:AMX). Telmex controls the landline phone while America Movil dominates the mobile phone market throughout Central and South America. Together, these companies make up nearly 30% of EWW’s stock holdings.

EWW is currently up about 5% on the year, putting it well ahead of most major US indexes. EWW charges an expense ratio of 0.52%.

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Disclosure: No positions

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