ILF - EWW: Mexican Stocks Rebound In 2023 Remain Inexpensive

2023-12-04 13:21:12 ET

Summary

• Latin American stocks have performed well in 2023, with ETFs from Brazil, Argentina, and Mexico outperforming the S&P 500.
• The iShares MSCI Mexico ETF is recommended as a buy, with value still seen in the south-of-the-border portfolio.
• EWW has a concentrated portfolio and high exposure to consumer staples, but its low valuation and strong momentum make it an attractive investment.

Latin American stocks are putting the finishing touches on what has been a very strong 2023. Companies based out of Brazil, Argentina, and Mexico have generally fared well, with ETFs of those nations surprising to the upside, outperforming the 20% total return of the S&P 500. I’m revisiting the iShares MSCI Mexico ETF ( EWW ).

I reiterate my buy rating on the fund following a mixed second-half performance. While there has been a healthy rebound in the shares, I still see value in this south-of-the-border portfolio.

YTD ETF Performance Heat Map: EWW Outperforming the S&P 500

For background, EWW aims to track the investment results of a broad-based index composed of Mexican equities. The fund is useful for investors seeking to own a broad basket of companies domiciled in Mexico and is generally considered to be among the most pointed funds in this geographic region, according to the issuer .

EWW is a moderately-sized ETF with just shy of $1.7 billion in assets under management as of December 1, 2023. Its yield is about 70 basis points above that of the S&P 500 at 2.36% and its share-price momentum has been extraordinarily strong lately, though I will detail a Q3 to early Q4 correction later in the article. With a 0.50% annual expense ratio , it’s considered a risky ETF based on the makeup of the portfolio and concentration, however. Still, EWW’s liquidity metrics are robust with average daily trading volume of just under three million shares, and its 30-day median bid/ask spread is narrow at just two basis points, per iShares.

Digging into the portfolio, the majority of the fund’s assets are considered large-cap blend. This core weighting means that significant movements in either the value or growth style shouldn’t lead to big relative moves one way or another with EWW's total return. What’s more, the ETF features a very low 10.1 price-to-earnings ratio while its long-term earnings growth rate is north of 9%, making for a PEG ratio barely above 1 – that is a compelling value. Considering the near-shoring and friend-shoring capital investment trends for US companies, with Mexican equities being a potential beneficiary, there could be robust growth ahead. Morningstar’s view confirms EWW's high momentum factor, too.

EWW: Portfolio & Factor Profiles

A key risk for investors to weigh is EWW’s high concentration in its top 10 assets. Keeping watch on its four largest positions, in particular, is key since those stocks comprise north of 40% of the allocation. That’s a significant risk. Moreover, there isn’t much in the way of sector diversification with EWW considering that Consumer Staples are 34% of the portfolio and Financials are about 20% of the 48-holding fund. Other cyclical areas have significant weights, and there is not much weight given to traditional growth niches, like Information Technology.

EWW: Holdings & Dividend Breakdowns

Seasonally, EWW tends to rally into early in the new year, according to data provided by Equity Clock , but we might have seen a pull-forward of this traditionally strong stretch. The past 20 years of price action reveal that the mid-January through early March period has seen its share of volatility.

EWW: Bullish Seasonal Factors Through Mid-January

The Technical Take

EWW rolled over around the middle of the year but found support in the low to mid-$50s. Notice in the chart below that a bearish rounded top pattern played out in Q3. Once the fund broke under its 200-day moving average, the bears really sunk their teeth into this country ETF. That is also when EWW broke its uptrend that dated back to September 2022. The correction hit about 20% at its October low, and a double bottom feature near $53 offered enough of a catalyst for buyers to step in with enthusiasm.

Also take a look at the volume by price indicator on the left side of the chart. EWW found support at the top end of a congestion zone from late 2020 through the first half of 2022. Earlier this year, I suspected that EWW may hold the $54 point, but a false breakdown under that March low helped set the stage for a strong rally in November. Today, with the ETF back above its 200-day moving average and with an RSI trend breakout helping to confirm the price action, a test of the YTD high appears in play. On the upside, keep $73 and $77 on your radar – those are previous highs from about a decade ago.

Overall, EWW has recovered well and is encroaching on fresh rebound highs amid strong momentum.

EWW: Bullish False Breakdown, Rebound Rally Confirmed by an RSI Breakout

The Bottom Line

I reiterate my buy rating on EWW. Its relative strength, fundamental benefits from friend-shoring, and low valuation are compelling factors.

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