How Deep Is Trump Trouble For Mexico ETFs?

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Includes: DBMX, EWW, HEWW, QMEX
by: Zacks Funds

Donald Trump's unexpected presidential victory has led to increased market and policy uncertainty. This has rendered emerging markets vulnerable due to their heavy reliance on exports and outsourcing.

One of the worst-affected countries will be Mexico. Trump has accused Mexico of taking away jobs from Americans and made it a prime target. If he goes by the policies mentioned during his campaign, it could hamper employment, GDP and exports. Mexican peso and the stocks were the hardest hit after the election results were announced. The Mexican currency slumped to a record low against the dollar.

In his campaign, Trump had stated that he will renegotiate or entirely terminate the North American Free Trade Agreement, also known as NAFTA, between the U.S., Mexico and Canada. This will hamper the trade relationship between Mexico and the U.S. and hurt the former's exports. The U.S. accounts for a major portion of Mexico's exports. In fact, exports to the U.S. make up for more than one-third of Mexico's GDP. Post renegotiation, higher taxes on Mexican goods could be levied, thus hurting exports and, in turn, GDP significantly.

In addition to NAFTA, the U.S. president-elect has also talked about building a wall along the U.S. southern border to curb Mexican immigrants entering the country illegally.

However, Trump is not the only problem plaguing Mexico. Earlier this year, Mexico's central bank surprisingly raised interest rates, adopting a contrasting stance compared to other emerging market economies, including its neighbor, Brazil.

Mexico's central bank took this step to stop the peso's slide. In a situation when the country's economy is already showing signs of a slowdown, Trump implementing his anti-Mexico policies could spell disaster.

ETFs in Focus

Below we highlight some Mexico-focused ETFs, which should be closely monitored. ETFs without a currency hedging tacked on it plunged significantly in the past 5 days as of November 11, 2016. The iShares MSCI Mexico Capped ETF (NYSEARCA:EWW) slumped 12.6%, while the SPDR MSCI Mexico Quality Mix ETF (NYSEARCA:QMEX) dropped 11.7%. Other Mexico funds, the Deutsche X-trackers MSCI Mexico Hedged Equity ETF (NYSEARCA:DBMX) and the iShares Currency Hedged MSCI Mexico ETF (NYSEARCA:HEWW), which are currency hedged, were broadly stable (see all the Latin American Equity ETFs here).

EWW: This ETF seeks investment results that correspond generally to the price and yield performance of the MSCI Mexico IMI 25/50 Index. The fund manages an asset size of nearly $1.5 billion and an average daily trading volume of 3.8 million shares. It charges an expense ratio of 49 basis points a year. The product has 62 stocks in its portfolio.

QMEX: This fund offers exposure to 32 Mexican stocks by tracking the MSCI Mexico Factor Mix A-Series Capped Index. It has accumulated $2.1 million in AUM. It charges 40 bps in fees per year from investors and trades in a paltry average daily volume of 1,000 shares. QMEX is set to be liquidated on or about November 21, 2016.

DBMX: This fund seeks investment results that correspond generally to the performance before fees and expenses of the MSCI Mexico IMI 25/50 US Dollar Hedged Index. It manages assets worth $4.4 million and an average daily trading volume of 1,850 shares. DBMX charges an expense ratio of 50 basis points a year.

HEWW: This ETF seeks to track the investment results of the MSCI Mexico IMI 25/50 100% Hedged to USD Index composed of large-, mid- and small-cap Mexican equities, while mitigating exposure to fluctuations between the value of the Mexican peso and the U.S. dollar. It manages an asset size valued nearly $1.1 million and paltry average daily trading volume of less than 1000 shares. The fund charges an expense ratio of 52 basis points a year.

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