Mexico: The lastest banking boom

It’s all about cheap and high yield ADR’s in capped ETF’s 

Mexico: The lastest banking boom

Mexico is the world’s 13th largest economy and its structure is seeing a rapid shift from a primary sector to an industrial and service economy. Amongst all the financial institutions in said country, a group of them are obtaining the best part of the Mexican’s transition to an industrialized economy: Grupo Fin Interacciones, Grupo Financiero Santander, and Grupo Financiero Banorte.

Banks make money from lending interest over approved loans to individuals and companies that develop a market activity. In return, banks assume the risk of default. In general, anyone living in a market economy has the freedom to start an enterprise, and, those who succeed, will establish a growing company. Once an organization has reached a certain size –depending on the nation-, it can go “public” on its local market.

Being public means that a percentage of the enterprise is sold to privates in exchange of money; if the company grows, so does the value of the percentage of it.

Everyone can go to one’s local stock market and buy whatever share one believes will become valuable in time. It is also possible to bet against a stock by borrowing it, selling it instantly and repaying it once its price has decreased. These operations involve risk unless sufficient information about the state of the company is owned. 

All three of the groups, Grupo Fin Interacciones, Grupo Financiero Santander and Grupo Financiero Banorte, are public listed companies in Mexico, which makes it an opportunity for American investors. In the eyes of an stockholder, the objective of a good investment is to reduce risk at the minimum and take return -money obtained- to the maximum.

In order to reduce risk, investors often buy a bundle of stocks and pile them all together in what is called a portfolio. In the end of the day, their profits depend on the aggregate change of each stock. The main issue with traditional portfolios is that they can be expensive to obtain as individual stocks may cost up to $245,000, as it’s the case of Warren Buffet’s Berkshire Hathaway.

A cheaper solution to the creation of a solid portfolio is called an Exchange-Traded Fund (ETF), which basically is a portfolio you can trade as common stock. Financial engineers created the MSCI Mexico Capped ETF, one ETF that is built upon stocks from Grupo Fin Interacciones, Grupo Financiero Santander and Grupo Financiero Banorte among others. The term “Capped” means shareholders can only be charged a limited annual operating expense.

Having a safe system to wrap the top Mexican financial institutions in a single product, there is one remaining issue to be solved for an American investor, and it’s how to actually buy a Mexican ETF in the United States.

A way to buy a Mexican stock in the United States is through an American Depositary Receipt (ADR). First, a broker buys the stock, ETF or given asset in the foreign country and takes it to a “custodian bank”. In the USA, a “depositary” bank will emit shares called receipts that mirror the assets that exist in the custodian bank. The receipts emitted by the depositary bank can be traded as any other common stock in the USA, which can be bought by any American stockholder. 

Through the use of ADR’s in capped ETF’s, American investors are obtaining yields –benefits- of 33.3% as of August 10. Meaning that every dollar invested in this financial product has given the investor a .33 cent profit.

ADR’s and ETF’s allow American investors to believe that foreign countries’ development in the safest and most efficient way to become prosperous.

 

Latin American Post | David Eduardo Rodríguez

Copy edited by Susana Cicchetto

 

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