Profit From Mexican Corporates With This ETF

There is a lot to like when it comes to Mexican sovereign debt.

While Latin America's second-largest economy is rated BBB by Standard & Poor's, just above junk status, there is little chance that rating will be downgraded anytime soon and the yields on U.S. Treasuries pale in comparison to their Mexican counterparts.

For example, the yield on 10-year Mexican sovereigns currently resides at 4.95 percent. Home to tame inflation, favorable tax rates and a new reform-minded president, it is not surprising that some noteworthy investors are bullish on Mexican sovereigns.

Perhaps investors should feel the same way about Mexican corporate debt. As one example of a reason why Mexican corporates are worth a look, Standard & Poor's recently revised its outlook on Mexico's state-run oil giant Petrleos Mexicanos, or Pemex, and that could prompt a credit rating upgrade sometime in the next 18 months.

Pemex "also serves as a useful case study for why we are optimistic about Mexican and emerging market corporate debt as a complement for more traditional corporate credit instruments of U.S. companies," said WisdomTree Portfolio Manager Rick Harper in a new research note.

Harper also notes the improving U.S. economy and government reforms initiated by President Enrique Pea Nieto as potential catalysts for Mexican corporates. At the ETF level, investors have at least one credible choice for gaining exposure to corporate debt issued by Mexican companies, that being the WisdomTree Emerging Markets Corporate Bond Fund (NASDAQ:EMCB).

EMCB, which is nearly 13 months old, has almost $128 million in assets under management. More importantly, the first ETF to serve as a pure play on emerging markets corporate bonds allocates almost 20.2 percent of its weight to Mexico. That makes Mexico the third-largest country weight in EMCB behind Brazil (26.33 percent) and Russia (21.96 percent).

Harper points out that EMCB's weight to Mexico is nearly triple that of the ETF's benchmark and almost twice that of the JPMorgan EMBI Global Index.

While Mexico is EMCB's third-largest country weight, individual Mexcian issues represent two of the ETF's top three holdings. Overall, EMCB has 33 holdings, five of which come courtesy of Mexican issuers, according to WisdomTree data.

More than 60.5 percent of EMCB's holdings are rated BBB and another 8.1 percent are rated A. The ETF's effective duration is 6.05 years with an average yield to maturity of 4.56 percent.

When EMCB debuted in March 2012, some critics thought the ETF was too narrowly focused to hold broad appeal for investors. Clearly, inflows to the fund have said otherwise. Additionally, EMCB's success prompted the creation of not one, but two copycat funds.

However, the iShares Emerging Markets Corporate Bond Fund (BATS: CEMB) and the BofA Merrill Lynch Emerging Markets Corporate Bond ETF (NYSE:EMCD) are both far smaller than the WisdomTree offering and neither offer the exposure to Mexico that EMCB does. For example, the iShares Emerging Markets Corporate Bond Fund has a weight of just 8.62 percent to Mexico.

For more on Mexican bonds, click here.