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Happy Fifth of July! Or, as they say in Mexico, “Feliz Cinco de Julio!”
All right, they probably don’t say it, since neither the fourth nor the fifth is a national holiday in Mexico. We did just see some big news across the border, though. Enrique Peña Nieto won a three-way race to become the nation’s next president.
As Mexico enters a new political chapter, today I’ll tell you why the economy down there looks very attractive. Then I’ll reveal some ways you can play it with ETFs.
Mexico May Be Ready for Take-off
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| Meet El Presidente |
People in border states know first-hand how closely the U.S. and Mexican economies are connected. Yet sometimes we still forget just how big Mexico is.
By total area, Mexico is the 13th largest nation in the world. A population around 113 million makes it the 11th most populous country. Among nations where Spanish is an official language, Mexico is the biggest.
Mexico’s economy? According to the World Bank, it is one of the planet’s top 15. And thanks to the North American Free Trade Agreement, Mexico is one of the world’s largest exporters.
We often miss what’s happening right under our noses. I would dare say that if any other country had similar numbers, U.S. investors would be clamoring to get aboard. Yet we hear relatively little about investment opportunities in Mexico.
Does Mexico have its share of problems? You bet. Corruption is everywhere — even giant Wal-Mart was participating in bribery, according to news reports over the last few months.
Then there is the violence. Drug cartels have turned large parts of Mexico into a war zone. Innocent bystanders are killed every day. Workers — and businesses — understandably try to avoid those areas.
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| Not a place you want to be! |
Hmm … world-class scale, productive workers, and untapped potential. If you’re a bottom-picker (a risky but potentially rewarding strategy), Mexico ought to look attractive.
What could turn the tide? In addition to Mexico’s own new government, changes in the U.S. might also make a difference. Policies on trade, immigration, drug enforcement, traffic safety, and everything else are on the table.
No matter who wins the U.S. elections in November, I won’t be surprised to see major changes that affect Mexico. And there are some ways you can participate with …
Mexico ETFs
Given Mexico’s size and proximity, you might expect more variety on the menu. Here is the very short list:
iShares MSCI Mexico (EWW) has been around since 1996 and currently has about $1 billion in net assets. The portfolio is heavy on telecom and consumer staples stocks — typical in emerging markets.
The long-term chart below shows something interesting. EWW is bumping up against long-term highs dating back several years.
The resistance looks solid, so now may not be the time to buy EWW. It’s been turned back from these levels several times in the past. The trend is definitely worth watching, though.
You can also play Mexico’s stock market with leverage via ProShares Ultra MSCI Mexico (UMX). Like other leveraged funds, UMX amplifies the returns of an already-volatile index. Look at this 2x leveraged ETF as a trading vehicle, not a long-term position.
The same warnings apply to ProShares UltraShort MSCI Mexico (SMK), which is designed to deliver daily results of twice the inverse of its base index.
If Mexico’s stock market runs into problems, SMK should do well. Likewise, it will drop hard if Mexico rallies.
Mexico and Latin America ETFs
If you want to take a less-aggressive and longer-term position, Mexico is a key component in some diversified Latin America ETFs. It comprises …
- 22 percent of iShares MSCI Emerging Markets Latin America (EEML)
- 27 percent of iShares MSCI Latin America 40 Index Fund (ILF)
- 12 percent of First Trust Latin America AlphaDex (FLN)
- 24 percent of SPDR S&P Emerging Latin America (GML)
- 15 percent of Market Vectors Latin America Small Cap (LATM)
Personally, I’m not jumping into any of these ETFs just yet … but I have my eyes on them. You may want to do the same. Good luck!
Best wishes,
Ron
P.S. To get my latest recommendations on Mexico and other global markets, check out my International ETF Trader.
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Aren’t ETFs dangerous because they have a lot of counter party risk?
Most ETFs do not have any counterparty risk. They are separate entities fully collateralized by their stock holdings.
There are two primary exceptions to this:
1) ETNs (exchange traded NOTEs) are not collateralized and carry credit risk of the issuer
2) Leveraged and inverse ETFs that use swaps to provide their target exposure. Although they are collateralized and are separate entities, there is counterparty risk associated with the other party in the swap transaction.
The ETFs mentioned in this article do not have counterparty risk.