Second Mexico ETF Arrives 15 Years After First

May 6, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs)

It’s hard to believe, but U.S. investors had to wait 15 years to be offered a choice of non-leveraged Mexico ETFs.  As a Cinco de Mayo present, Global X ended that wait with yesterday’s (5/5/11) launch of Global X Mexico Small-Cap (MEXS).  MEXS becomes the first ETF to target Mexican small cap companies.

The underlying Solactive Mexico Small-Cap Index contains companies that are domiciled or have their main business operations in Mexico and whose market capitalization is less than $3 billion.  This produces a universe representing the smallest 10% by market capitalization of Mexican stocks.  The index weights each stock by its free float market capitalization.  For added diversification, the weight of each component is capped at 4.75% as part of the 6-month rebalancing.

With only 28 holdings, the 4.75% weight cap affects the majority of stocks in the fund.  The complete list of holdings shows 15 stocks whose current weightings range from 4.2% to 5.1%.  The variations are the result of individual stock performance since the last index rebalancing.

According to the Global X press release (pdf), small-cap stocks can provide more targeted exposure to the domestic economy because large-cap stocks often have significant international operations while small-cap stocks generally receive the majority of their revenues from the domestic economy.  The sector representation tends to support that claim with Consumer Discretionary at 29.4%, Industrials 22.6%, Consumer Staples 20.5%, Financials 11.7%, Materials 8.9%, Health Care 4.7%, and Telecommunications 2.1%.

The first Mexico ETF, iShares MSCI Mexico Investable Market Index Fund (EWW) (EWW overview page), was launched in March 1996 and uses a traditional market cap weighting approach that tends to provide a large-cap bias.

There is significant overlap between the holdings of MEXS and EWW with more than half of the stocks in EWW eligible for inclusion in MEXS.  However, due to the market cap weighting employed by EWW, the allocation overlap is only 10%.

EWW also has sector weightings that are quite different with Telecommunication Services 27.6%, Consumer Staples 26.2%, Materials 16.3%, Industrials 10.1%, Consumer Discretionary 10.0%, Financials 9.0%, and Health Care 0.8%.

As a result, MEXS should provide investors with different exposure than EWW.  Whether that difference is better or worse will depend on the relative performance of small cap to large cap stocks in Mexico.

There are two other ETFs that track the same index as EWW, however they both employ leverage.  ProShares Ultra MSCI Mexico Investable Market (UMX) provides +200% daily exposure, while ProShares UltraShort MSCI Mexico Investable Market (SMK) provides -200% (inverse) daily exposure.

MEXS has an expense ratio of 0.69%, and additional information is located in the summary, fact sheet (pdf), and the Mexico Small Cap Investment case (pdf).  The prospectus (pdf) also covers six additional ETFs that are not yet available: Global X UK Small-Cap ETF, Global X Germany Small-Cap ETF, Global X Hong Kong Small-Cap ETF, Global X Singapore Small-Cap ETF, Global X South Korea Small-Cap ETF, and Global X Taiwan Small-Cap ETF.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Comments

One Response to “Second Mexico ETF Arrives 15 Years After First”

  1. Jim on May 18th, 2011 4:25 pm

    I would love to see a 3x Mexico leveraged ETF. Direxion filed some paperwork with the SEC listing certain proposed 3x leveraged ETFs, one of which was for Mexico, but they never introduced one. According to the daily closing index values posted on the iShares website, the MSCI Mexico Index rose 27.45% in 2010. According to my calculations, a 3x ETF tracking exactly three times the daily % changes of the MSCI Mexico Index would have risen about 81.15% in 2010.