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Mexican Economy Shrinks First Time in 3 Years: ETFs to Watch

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According to the preliminary data released by Mexico’s statistical agency (INEGI) last Friday, the second-largest Latin American economy witnessed contraction in the second quarter for the first time in three years. Dismal growth in manufacturing, agriculture and service sectors, and a decline in exports to the U.S. had a negative impact on the country’s economy during the quarter.

The final reading of the second quarter’s GDP growth, which is scheduled to release on Aug 22, will be closely watched by investors. Hence, ETFs having significant exposure to Mexico will also remain on investors’ radar.

First Contraction in Three Years

The INEGI preliminary report showed that the Mexican economy contracted 0.3% in the second quarter from the previous quarter, implying a decline for the first time since second-quarter 2013. Though GDP grew 2.4% year over year, it was lower than the first-quarter growth rate of 2.6%. Decline in industrial production played an important role in dragging GDP down during the second quarter. According to the report, the industrial sector contracted 1.7% sequentially, reflecting the worst decline since first-quarter 2009.

A decline of 0.1% in the agriculture sector and unchanged growth in the services sector also weighed on the Mexican economy. Multiple rate hikes in recent times had a negative impact on investment, which in turn dragged the economy down. In order to combat rising inflation on the back of a declining Peso, the currency of Mexico, Banco de Mexico opted for two rate hikes this year (read: Inside the BullMark Latin American ETF with Dividend Focus).

Weak Export to U.S., Oil Outputs

Moreover, a drop in the country’s exports to the U.S. also weighed on the second-quarter GDP. Also, the recently released ‘advance estimate’ data of the Bureau of Economic Analysis shows that total imports by the U.S. declined 0.4% in the second quarter after declining 0.6% in the first. Imports of goods also dropped 0.9% in the quarter, which was preceded by a first-quarter decline of 1.3%.

Separately, declining oil prices weighed on the country’s oil production, which in turn had a negative impact on the economy during the second quarter. Petroleos Mexicanos, the state-owned oil manufacturer, continued to post losses amid record low levels of crude production despite the expansion in government’s expenditure on the producer. Moreover, domestic consumption, which remained one of the major drivers of economic growth, was sluggish.

ETFs in Focus

Despite dismal second-quarter preliminary GDP data, Mexico is expected to witness a moderate growth rate this year. Though 2016’s expected growth rate of 2.4% is below the 2.5% rise in 2015, the economy is expected to expand 2.7% next year. Moreover, the recent surge in emerging markets may also help the economy to recover in the quarters ahead. We have highlighted three ETFs that have significant exposure to securities from Mexico and are expected to be in focus in the coming days (read: Yield Hungry Investors Gobble Up EM Bond ETFs).

MSCI Mexico Hedged Equity ETF

This product tracks the MSCI Mexico IMI 25/50 US Dollar Hedged Index. In total, it holds 61 securities with almost 60% of its assets allocated to the top 10 holdings. DBMX has AUM of $4.3 million and light average daily volume of around 1,000 shares. From a sector look, consumer staples takes the top spot at 28.5% while financials, materials, industrials and telecom round off the top five. The ETF charges 50 bps in annual fees. It has a Zacks Rank #2 (Buy) with a Medium risk outlook (see all Latin American Equity ETFs here).

iShares MSCI Mexico Capped (EWW - Free Report)

This fund provides exposure to 63 firms by tracking the MSCI Mexico IMI 25/50. The fund is quite popular with AUM of more than $1 billion while it has an average daily volume of more than 2 million shares. The product has nearly 60% of its assets invested in its top 10 holdings. Sector-wise, consumer staples takes the top spot at 27% while financials (21.3%) and materials (15.1) hold the next two positions. EWW charges a fee of 48 bps annually and has a Zacks Rank #3 (Hold) with a Medium risk outlook (read: Best Latin America ETF Bets for 2H16).

SPDR MSCI Mexico StrategicFactors ETF

With AUM of $2.2 million, this product tracks the MSCI Mexico Factor Mix A-Series Capped Index. In total, it has a portfolio of 32 securities, with 58% of its assets allocated to the top 10 holdings. From a sector look, consumer discretionary takes the top spot with one-third of the fund’s assets while materials, industrials, financials and telecom also have double-digit allocation each. The ETF has an expense ratio of 0.40% and trades in a light volume of around 4,000 shares a day. It has a Zacks ETF Rank #4 (Sell).

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