Mexican institutional investors have tapped into a winning formula by pouring billions of dollars into currency-hedged short duration US Treasury ETFs, more than doubling their potential return owing to positive carry.
According to data from TrackInsight, investors have allocated almost $5.4bn to five Mexican peso-hedged share classes so far in 2024, as at 30 August.
Year-to-date inflows:
iShares $ Treasury Bond 0-1yr UCITS ETF – MXN Hedged (IB1MXX) +$2.2bn
Xtrackers US Treasuries Ultrashort Bond UCITS ETF 3C – MXN Hedged (XTMXX) +$1.2bn
Vanguard US Treasury 0-1 Year Bond UCITS ETF – MXN Hedged (MSTX) +$1.1bn
JPM BetaBuilders US Treasury Bond 0-1yr UCITS ETF – MXN Hedged (MBIL) +$487m
JPM BetaBuilders US Treasury Bond 0-3 Months UCITS ETF – MXN Hedged (MB3M) +$478m
While most investors’ eyes have been fixed on the unwinding Japanese yen carry trade, Mexican institutions have been cashing in on the effect of hedging their short-dated US Treasury exposure to their home currency.
In fact, while the US dollar unhedged iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) returned 3.3% between the turn of the year and 19 August, IB1MXX booked 7.2% gains over the same period.
Despite the Banco de Mexico cutting its reference rate by 0.25% last month, its policy rate still remains at 10.25%, with expectations this will remain elevated even as the Federal Reserve and others undergo dovish pivots.
Vasiliki Pachatouridi, head of iShares fixed income product strategy EMEA, commented: “Our MXN-hedged suite of ETFs have introduced bond ETFs to Mexican investors seeking broader fixed income exposures outside of local Mexican bonds, while still capturing the positive carry offered by MXN.”
Salvador Gomez, head of sales Xtrackers, Latin America and US offshore at DWS, told ETF Stream: “The vast majority of this flow is coming from institutional Mexican investors, definitely some private banks are offering these types of products in their model portfolio allocations and then there are some quasi-institutional multi-family offices offering these type of products.”
However, Gomez suggested investors may also be using these instruments to synthetically replicate some local fixed income exposure, owing to the small number of scaled fixed income ETFs capturing Mexican sovereign bonds.
“These products help investors to have efficient access to these markets while also being exposed to the Mexican peso through a UCITS structure,” he said.
“This is very appealing to the Mexican investor as the UCITS wrapper creates additional efficiencies with respect to the accumulating share classes.”
To-date, the HANetf Finamex Mexico S&P/BMV International UMS Sovereign Bond 5-10yr UCITS ETF (MEXS) is the only ETF providing exposure to Mexican sovereign issuance in UCITS format.
