An Alternative To South Of The Border ETF Investing

For several years now, investing in emerging markets stocks and exchange-traded funds has proven hazardous to portfolios' health. Latin America equities and ETFs have been especially harmful, standing as obvious laggards in an asset class that is obviously lagging.

Slack commodities demand, one of the emerging world's worst-performing currencies, widespread and highly publicized corruption scandals and Standard & Poor's recently downgrading Brazil's sovereign credit rating are among the reasons Brazilian stocks are flailing.

Brazil, Mexico Economies Slip

Brazil, the region's largest economy, has delivered some egregious offenders in the world of ETFs, but the iShares MSCI Mexico Inv. Mt. Idx. (ETF) EWW will not win any beauty contestants with a 12-month loss of nearly 17 percent. Mexico's economy shares ominous traits with Brazil, including being pinched by slack commodities demand and a currency that has recently touched record lows against the U.S. dollar.

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Those traits have sent investors scampering out of EWW.

The largest Mexico ETF “has posted $118.9 million in outflows so far in 2016, the most among similar funds from major emerging markets after Taiwan, according to data compiled by Bloomberg. While the Latin American nation’s benchmark IPC equity gauge has climbed 1.5 percent in the span, it’s slumped 4.8 percent when measured in dollars. The peso has slid 6.3 percent this year, the most among major currencies,” according to Bloomberg.

Another Alternative

With the peso proving problematic for EWW, investors looking south of the border ought to consider the Deutsche X-trackers MSCI Mexico Hedged Equity Fund (DBX ETF Trust DBMX). DBMX does not get attention that euro and yen currency hedged ETFs garner, but the peso-hedged ETF has outperformed the unhedged EWW by nearly 200 basis points over the past 12 months.

“Often, a foreign market may appreciate in domestic currency terms, while its currency may weaken simultaneously against the U.S. dollar. Currency hedging allows investors to share in the foreign market’s gains without sacrificing part or all of the return on the ETF shares due to currency depreciation,” according to Deutsche Asset & Wealth Management.

Another reason investors have departed the Mexico ETF is valuation. While investors keep hearing how inexpensive emerging markets are, that is not the case with EWW, which trades at triple the earnings multiple of the MSCI Emerging Markets Index.

Part of the reason Mexican stocks often trade at premium valuations to broader emerging markets benchmarks is the market's hefty weight to defensive sectors. For example, consumer staples stocks account for over 30 percent of DBMX's weight. Telecom commands 14 percent of DBMX with Carlos Slim's America Movil SAB de CV (ADR) AMX accounting for most of that exposure.