Mexico ETF Near High As Economy Improves

After a 29% plunge last spring, iShares MSCI Mexico Index Fund has rallied back to become one of the best performing ETFs of 2006, up 23% since Jan. 1.

The ETF suffered on the combined effects of a springtime correction in emerging markets and Mexico's election, says Nick Cherney, a portfolio manager with iShares in San Francisco.

Heading into the July 2 election, Mexican stocks started recovering. A narrow victory by conservative Felipe Calderon immediately met a challenge from the loser, leftist Andres Manuel Lopez Obrador. That unsettled Mexican markets.

On Sept. 5, election officials confirmed Calderon's victory. Still, Obrador refused to concede, and vowed to set up a parallel government. The iShares Mexico ETF struggled some, although it found support at its 50-day moving average and has continued higher.

Election Over

Cherney says the election was a key event for Mexico's markets, but only part of a major growth trend. The ETF has a 10-year annualized return of 16%, leading all iShares ETFs for that time frame.

A stable currency, abundant trade with the U.S. and development of the country's infrastructure are the main undercurrents.

Mexican imports to the U.S. are growing at a faster rate than Chinese imports, Cherney says.

"Mexico is not a short-term trend," Cherney said. "There are a lot of important structural reasons Mexico has performed as well as it has, and we don't see those reasons going away anytime soon."

The ETF is modeled after the Morgan Stanley Capital International Mexico Index and is heavily weighted on telecom stocks.

Cellular Service

Almost 25% of iShares MSCI Mexico's portfolio consists of America Movil (NYSE:AMX - News), the wireless service provider. The stock is trading near all-time highs as it produces solid earning and sales gains.

The telecom business is promising in Mexico as it is in other developing nations, says Anthony Welch, a portfolio manager at Sarasota Capital, a Florida investment advisory firm that specializes in ETF investments.

The old landline phone system was lacking in many respects. When cellular service arrived, it made for better service in a more efficient delivery.

"You still have to build towers and infrastructure," Welch said. "But it's a lot cheaper than running wires all over the country."

Other big holdings are Cemex (NYSE:CX), the cement giant, beverage company Fomento Economico Mexicano (NYSE:FMX ) and media firm Grupo Televisa (NYSE:TV).

Ian Naismith, also of Sarasota Capital, says a plus for Mexican stocks is that the highest individual and corporate tax rates are being slashed to 28%.