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How Deep is Trump Trouble for Mexico ETFs?

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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 (read: Foreign ETFs to Win or Lose on Trump Victory).

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 (read: ETFs & Stocks That Topped or Flopped After Trump Won).

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 (read: Can Brazil ETFs Keep Up Their Amazing Run?).

Mexico’s central bank took this step to stop peso’s slide. In a situation when Mexico’s economy is already showing signs of a slowdown, Trump implementing his anti-Mexico policies could spell disaster (read: Mexico ETFs to Hinge on U.S. Presidential Election).

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 EWW slumped 12.6%, while SPDR MSCI Mexico StrategicFactors ETF QMEX dropped 11.7%. Other Mexico funds, Deutsche X-trackers MSCI Mexico Hedged Equity ETF and iShares Currency Hedged MSCI Mexico ETF 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 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. The fund 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. The fund 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. This fund 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. The fund manages assets worth $4.4 million and an average daily trading volume of 1,850 shares. The fund charges an expense ratio of 50 basis points a year (read: Mexican Economy Shrinks First Time in 3 Years: ETFs to Watch).

HEWW: This ETF seeks to track the investment results of 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. The fund 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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