Political Unrest Puts Spotlight on Mexico ETFs

Political unrest ensued in Mexico as the unexpected resignation of Mexico’s Minister of Finance Carlos Urzúa had its toll on Mexican assets following the news. Mexico President Andrés Manuel Lopez Obrador (AMLO) cited disagreements over “development plans for Mexico” as the reason.

The latest political developments will certainly put Mexico-focused exchange-traded funds (ETFs) in the spotlight.

“One immediate concern is that these policy disagreements (as well as the quality of fiscal spending) might finally get noticed by rating agencies,” wrote New York-based management firm VanEck in an email.  “Another risk is that if the currency does not bounce back, the weakness can add to inflation pressures making it more difficult for the central bank to lower the policy rate.”

While the majority of the capital markets were focused on the U.S.-China trade war, June brought a new opponent to the tariff-for-tariff battle in Mexico. U.S. President Donald Trump turned his attention to Mexico in the latest tariff wars by announcing a 5 percent tariff on all Mexican imports–a move meant to urge Mexico to “reduce or eliminate the number of illegal aliens” entering the U.S.

Late last year, border wall funding has been a topic of contention in Congress after the U.S.-Mexico border situation escalated as the number of migrants heading into Mexico from Central America multiplied exponentially while attempting to seek asylum within the U.S. The number of those applying for asylum legally outweighs the number of immigration officials that can process the requests, causing a situation in Mexico where the country could be overrun by overcrowded migrant camps and shelters.

ETF investors who see a possible trade brewing in the newest U.S.-Mexico trade saga can look to ETFs like the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) or for more juice, the Direxion Daily MSCI Mexico Bull 3X ShsETF (NYSEArca: MEXX). However, investors who can sense an opportunity in the pullback can try their hands at those ETFs.

In the meantime, the U.S.-China trade impasse paved the way for discounts in a lot of U.S. equities, but it also put the red tag sale in the emerging markets (EM) space. With the latest U.S. move against Mexico, one corner of EM that investors may not have considered is within Latin America.

While most investors might have been driven away by the losses in EM during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.

EM can also provide opportunities for dividend-seeking investors. Latin America, once again, could be an alternative investors may not have yet taken into consideration. For a Latin America-specific ETF trade, consider the Direxion Daily Latin America Bull 3X ETF (NYSEArca: LBJ).

LBJ seeks daily investment results equal to 300% of the daily performance of the S&P Latin America 40 Index. The index itself is a float-adjusted market capitalization weighted equity index of issuers drawn from five major Latin American markets: Brazil, Chile, Columbia, Mexico, and Perú.

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