Taking Mexico Seriously: 7 ETFs Profiting From the Country's Renaissance

by: World Market Pulse

For years the most prominent feature of Mexico has been its exotic cuisine with all its varied flavors, colorful decoration, and variety of spices while investment options were never taken seriously. Longtime investors have viewed other Latin American economies like Brazil and Argentina with more interest discussing plans possibly sitting in a restaurant serving Mexican cuisine.

While Mexico doesn't quite enjoy the celebrity status of rival Brazil, there is no denying the fact that the country is undergoing something of an economic renaissance. With its last financial crisis more than 10 years behind it, Mexico is enjoying record foreign currency reserves and an investment-grade debt rating, thanks to much-improved fiscal discipline. It even boasts several companies listed on the New York Stock Exchange or NASDAQ and dozens of others that trade over the counter. Money managers are especially keen on stocks in the residential construction business as more and more Mexicans qualify for loans to build their own homes.

  • The Mexican economy rebounded in the first quarter of this year, expanding more than 4 % from a year earlier after contracting 2.3 % in the last three months of 2009.
  • Mexico’s international reserves reached a record $95.7 billion in March. The oil and manufacturing sectors are showing strong improvements and Mexican exports increased by 39% in March relative to March 2009.
  • The automotive industry, one of the most important industries in the country, is recovering strongly with production and exports up in the first four months of this year. The unemployment rate in the first quarter stood at 5.3%.
  • Rich in farmland, silver and copper, Mexico is the world’s 11th largest economy and is known for being a free trade economy that is heavily geared towards exports. Mexico’s trade is based on free trade agreements with more than 40 countries, including Japan, Israel, EU and various Central and South American countries.
  • Mexico provides security and legal protection for foreign investors through Bilateral Investment Treaties (BIT’s) negotiated with 24 countries and a skilled and competitive labor force.

Mexico’s peso has been a major gainer against the dollar in recent weeks as an economic recovery in the U.S. fuels demand for the Latin American nation’s exports. Mexico’s economy is looking at a 5% growth rate as it recovers from the recession this year. The official forecast is set at 4.1%. With as many as six Mexican companies looking to go public this year, a rise in the Mexican IPO activity might just be the catalyst for speeding up the country's economic growth. There are a number of ways to include Mexico in your investment portfolio. Here is a list of some the best performing Mexican ETFs.

Top 7 ETFs For Investing In Mexico

MSCI Mexico Index Fund (EWW): The index measures the performance of the Mexican equity market.

  • EWW Top Ten Holdings

1. America Movil S.A.B. de C.V. : 23.66%
2. Wal-Mart De Mexico SAB de CV (NYSE:WMT): 9.09%
3. CEMEX SAB de CV (NYSE:CX): 6.62%
4. Grupo Mexico, S.A.B De C.V: 4.94%
5. Grupo Televisa SA: 4.67%
6. Fomento Económico Mexicano, S.A.B. De C.V (NYSE:FMX).: 4.67%
7. Telmex Internacional S.A.B. de C.V. (TII): 3.74%
8. Grupo Financiero Banorte, S.A.B De C.V. (OTCQX:GBOOY): 3.61%
9. Telefonos de Mexico,S.A.B. de C.V. (NYSE:TMX): 3.34%
10. Carso Global Telecom: 3.12%

  • Expense Ratio: 0.52%
  • EWW Sector Breakdown

Telecom 34.88%
Industrial Materials 21.21%
Consumer Goods 13.59%
Financials 11.48%
Consumer Services 10.25%
Media 5.09%
Business Services 2.82%
Health Care 0.39%

Mexico Fund Inc. (MXF): The Mexico Fund, Inc. (the Fund) is a closed-end, non-diversified management investment company. The Fund's investment objective is to seek long-term capital appreciation through investment in securities, primarily equity, listed on the Mexican Stock Exchange. The Fund may invest in Mexican fixed-income securities and bank time deposits of Mexican banks.

  • Top 10 Holdings

America Movil, S.A.B. de C.V. 19.23%
Wal-Mart De Mexico SAB de CV 10.46%
Grupo Mexico SA De CV Gmexico 7.54%
Grupo Televisa SA 4.99%
Fomento Económico Mexicano, S.A.B. De C.V. 4.21%
Kimberly Clark de Mexico SA de CV 4.04%
Cemex S.A. 3.74%
Mexichem, S.A.B De C.V 3.74%
Grupo Financiero Banorte, S.A.B De C.V. 3.33%

  • Total Expense Ratio: 1.72

iShares S&P Latin America 40 Index Fund (ILF):The index measures the performance of four Latin American equity markets: Mexico, Brazil, Argentina, and Chile. The fund has 24.81% holdings in Mexico.

  • ILF Top Ten Holdings

1. Vale S.A. (NYSE:VALE): 12.05%
2. America Movil S.A.B. de C.V.: 10.96%
3. Itau Unibanco Holding S.A. ADR (NYSE:ITUB): 10.48%
4. Petroleo Brasileiro S.A. ADR (NYSE:PBR): 8.95%
5. AmBev ADR: 4.94%
6. Bank Bradesco ADR (NYSE:BBD): 4.76%
7. Wal-Mart De Mexico SAB de CV (WMT): 3.52%
8. Companhia Siderurgica Nacional ADR (NYSE:SID): 3.49%
9. Petroleo Brasileiro S.A. ADR (NYSE:PBR.A): 3.45%
10. Santander-Chile Bank ADR (NYSE:SAN): 3.31%

  • Expense Ratio: 0.50%
  • LF Sector Breakdown

Industrial Materials 27.75%
Financials 22.38%
Telecom 13.12%
Energy 12.40%
Consumer Goods 9.54%
Utilities 7.78%
Consumer Services 3.52%
Business Services 1.65%
Media 1.62%

Silver Miners ETF (SIL): The index is designed to reflect the performance of the silver mining industry. It is comprised of common stocks, ADRs and GDRs of selected companies globally that are actively engaged in some aspect of the silver mining industry such as silver mining, refining or exploration. The fund has 24.90% holdings in Mexico.

  • SIL Top Ten Holdings

1. Silver Wheaton Corporation (NYSE:SLW): 14.34%
2. Fresnillo PLC (OTC:FNLF): 13.82%
3. Pan American Silver Corporation (NASDAQ:PAAS): 12.36%
4. Industrias Penoles SAB de CV: 10.56%
5. JSC Polymetal GDR: 5.08%
6. Coeur D'Alene Mines Corporation (NYSE:CDE): 4.59%
7. Silver Standard Resources, Inc. (NASDAQ:SSRI): 4.48%
8. Hochschild Mining PLC: 4.40%
9. Hecla Mining Company (NYSE:HL): 4.39%
10. Silvercorp Metals Inc. (SVMFF.PL): 4.33%

Expense Ratio: 0.65%

Latin America Small-Cap Index ETF (LATM): The index tracks the performance of publicly-traded small cap companies that are headquartered in Latin America or that generate the majority of their revenues in Latin America. The fund has 22.82 % holdings in Mexico.

  • LATM Top Ten Holdings

1. Pan American Silver Corporation (PAAS): 4.77%

2. Banco Compartamos, S.A., Institucion De Banca Multiple (OTC:BMOSF): 3.94%

3. Diagnosticos da America S.A.: 3.31%
4. Anhanguera Educacional Participacoes SA: 3.30%
5. Alamos Gold Inc. (AGIGF.PK): 2.91%
6. Tv Azteca, S.A. de C.V.: 2.86%
7. Silver Standard Resources, Inc. (SSRI): 2.56%
8. Empresas La Polar SA: 2.55%
9. Corporacion Geo, S.A.B. de C.V.: 2.54%
10. Totvs S.A.: 2.47%

  • Expense Ratio: 0.63%
  • LATM Sector Breakdown

Industrial Materials 35.80%
Financials 15.41%
Business Services 8.56%
Consumer Goods 7.74%
Consumer Services 5.74%
Energy 5.33%
Health Care 5.15%
Media 3.49%
Software 3.46%
Utilities 3.00%
Telecom 0.90%
Hardware 0.46%

SPDR S&P Emerging Latin America ETF (GML): The S&P Latin America BMI Index is a market capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in emerging Latin American markets. The fund has 20.25% holdings in Mexico.

  • GML Top Ten Holdings

1. Petroleo Brasileiro S.A. ADR (PBR.A): 6.32%
2. America Movil S.A.B. de C.V.: 6.03%
3. Vale S.A.: 5.70%
4. Itau Unibanco Holding S.A. ADR (ITUB): 5.21%
5. Vale S.A. ADR (VALE): 5.13%
6. Petroleo Brasileiro S.A. ADR (PBR): 5.04%
7. Bank Bradesco ADR (BBD): 3.60%
8. AmBev ADR: 2.86%
9. Itausa Inv Itau Sa: 2.58%
10. Companhia Siderurgica Nacional ADR (SID): 2.15%

Expense Ratio: 0.59%

  • GML Sector Breakdown

Industrial Materials 25.96%
Financials 20.98%
Energy 14.63%
Consumer Goods 12.34%
Telecom 8.90%
Consumer Services 5.53%
Utilities 3.84%
Business Services 2.23%
Media 1.44%

CurrencyShares Mexican Peso Trust (FXM): The fund is designed to track the price of the Mexican peso relative to the U.S. dollar.

  • Expense Ratio: 0.40%
  • Market Cap: $39.48 M
  • Avg Volume: 10,549

Overview Of The Mexican Economy

Mexico is a federal constitutional republic in North America, bordered by the United States on the north and by Belize and Guatemala on the south-east. The south and west is flanked by the Pacific Ocean and the Gulf of Mexico on the east. Mexico’s has an estimated population of 111 million, and its economy is the 13th largest in nominal GDP terms ($1.143 trillion -2009) and the 11th largest by Purchasing Power Parity (PPP, $1.563 trillion – 2009). Furthermore, Mexico’s economy is part of the North American Free Trade Agreement ((NAFATA)), a trilateral trade bloc in the region comprising of the US, Canada and Mexico. Similar to economies of developed nations, Mexico's economy is dominated by its services and industrial sectors. Top services include banking, education and telecommunications. Mexico's main industries are cement and construction, food and beverages, and fossil fuel production.

Improving Infrastructure: The Mexican government under President Felipe Calderon has created the National Infrastructure Fund to improve the country's 14 national highways. This fund contains $25 billion for highway, rail and IT infrastructure throughout Mexico. While southern states remain spotty in terms of public safety and reliable public transit, the government of Mexico is clearly focusing on gaining easier access to remote regions of Mexico to attract foreign investors.

Negatives Of The Mexican Growth Story

In 2009, the economic profile for Mexico took a turn for the worse. Widespread disease in the form of a flu outbreak added to the failing economy in 2009. Policy stimulus proved inadequate against the background of limited fiscal stimulus and monetary relaxation. From an all-time low rate of annual inflation of 3.3% in 2005, this rate has only recently displayed signs of reducing from 6.4% in 2008 to 5.4%. These fluctuations are largely caused by the economy of Mexico’s close association with US business and trade. Noted economists and financial analysts, after their Mexico economic review, have said that Mexico’s economy is suffering grievously as a result of economic turbulences in USA. Its stock markets are being affected as well. This is because USA purchases 80 percent of all goods and services exported by Mexico. This global financial catastrophe kicked off in August 2008 and since then peso has lost 33.3 percent of its worth with respect to United States dollars. To reduce its over dependence on the United States, Mexico has recently tried to better diversify its trade partners, signing agreements with China, the European Union, and other Latin American countries. Local companies are trying to attract more international business, but lately one of the biggest dampers on the economy has been the rampant drug violence.

Outlook 2010 And Beyond: For the year 2010, the growth figures pertaining to the Mexican economy indicate signs of a recovery. The Mexican Finance Ministry has increased the growth figures from 3% to 3.9%. This upswing was the result of significant improvement in Mexico’s exports, automobile production, manufacturing and increased imports of consumer goods. Employment is also on the rise alongside an increase in foreign and domestic demand, despite a deep divide in economic distribution, where 32% of the top earners take in 55% of the country’s total income. In January 2009, President Calderon, in order to prevent layoffs, has added $150 million in Mexican economic stimulus package. Companies have been given an income tax relief of 3 percent and a reduction of 20 percent in electricity rates as part of economic stimulus package to Mexico.

The Mexican economy has its pitfalls, most notably the over-concentration of its markets in a few big names, and drug-related lawlessness along the U.S.-Mexican border. Still, this diverse economy, with its rich natural resources and manufacturing might, offers investors a different take on the Latin American story.

Disclosure: No Positions