ETF Update: ERO and Dollar's Temporary Gain, Dividend ETF with Fundamental Indexing, Mexican Economic Growth

Topics in this update include: ERO and Dollar's Temporary Gain, Dividend ETF with Fundamental Indexing, Mexican Economic Growth.

ERO and Dollar's Temporary Gain
At least one ETN and the dollar's value might benefit from the subprime meltdown and housing slump.

Last week, when French bank BNP Paribas froze three security funds that invest in U.S. subprime mortgages, it prevented people from getting their money out. This indicated a shortage of dollars in the world, Ashley Milne-Tyte in a Marketplace segment for American Public Media.

Now the dollar is getting a boost as BNP Paribas and other European banks scramble to buy dollars to pay back loans used to purchase that debt. This is wonderful news for the dollar that has been at historic lows against the pound and euro for the last few weeks. Will the iPath EUR/USD Exchange Rate ETN (ERO) be affected by the recent events?

Some experts see the dollar's gain as temporary. Investors are buying the U.S. dollar only to pay back loans, not because they like what's happening in the U.S. This could mean the dollar will decline again when the subprime mess is over.

Dividend ETF with Fundamental Indexing
Dividend ETFs offer the perk of extra income to shareholders. What would happen if a dividend ETF used a fundamental indexing approach to investing?

ETF provider WisdomTree took this approach when it began offering its ETFs based on dividend yield a little over a year ago. There are currently 38 WisdomTree ETF offerings, including WisdomTree Dividend Top 100 (DTN).

DTN is made up of the 100 highest-yielding of the 300 largest companies by market capitalization in WisdomTree's LargeCap Dividend Index, according to Tim Hanson for The Motley Fool. DTN weighs its holdings by yield instead of market capitalization. This combination of dividend ETFs with a fundamental indexing approach was created by Jeremy Siegel.

Buyer beware though: This fund has a large holding in Bank of America (BAC) that might be feeling the effects from the credit crisis. The stock might appear to have a high yield only because investors are wary, and the price has dropped. DTN is currently down 1.3% year-to-date and is below its long-term trend line.

DTN 1-yr chart:

Mexican Economic Growth
It seems no country-based ETF can hide from the market's recent, sharp decline, not even our neighbor Mexico. Although the iShares MSCI Mexico Index (EWW) is down 16.6% for the month, it's up 4.3% year-to-date.

The market decline can make it difficult to see Mexico's economic progress during the second quarter. The country's economic growth grew most likely because of the U.S.'s demand for exports, according to Patrick Harrington for Bloomberg. Construction output rose 1.2%, and GDP grew 2.9% annually in the quarter. However, Mexican interest rates are at 7.25% as a "preventative" measure to offset rising food costs. In July, the price of tomatoes, milk, avocados and other Mexican consumer prices rose 4.1%, which is its largest increase in six months.

EWW 1-yr chart: