ETFs To Watch On NAFTA Talks

The Canadian dollar and Mexican peso slid and stocks traded lower, as two Canadian government officials said that they expect President Donald Trump to soon announce that the United States intends to pull out of NAFTA. Even Wall Street traded lower on the said concerns.

Although it is not certain if the United States will quit NAFTA even if Trump gives the required six months’ notice, the prospect of U.S. withdrawing from the trade pact among the three countries has rattled investors.

Investors Remain Cautious

Officials from the three nations are due to hold the second-last round of negotiations in Montreal on the trilateral free trade agreement. It is scheduled to be held from Jan 23-28.

A potential notice of withdrawal would further invite opposition from the Congress and Trump is expected to face court challenges for his decision. Moreover, even if the termination letter is sent across to the countries that are party to the 24-year old agreement, the United States will not be able to legally quit the NAFTA once the six month period expires. “He can gain political mileage out of a big announcement to quit NAFTA without actually doing it,” per a Global News article citing Gary Hufbauer, a senior fellow and trade expert at the Peterson Institute for International Economics.

Bulk of U.S. trade deficit with Mexico is from the auto sector. Trump has blamed NAFTA for the loss of thousands of American jobs. However, various studies show that automation and technology are particularly responsible for the loss of jobs in the auto sector.

Let us now discuss the ETFs likely to be impacted by a potential breakdown in NAFTA.

iShares Core S&P 500 ETF IVV

This fund is a low-cost ETF that seeks to provide exposure to the large established U.S. companies and tracks the S&P 500 index. It garnered $30.2 billion in inflows in 2017.

It has AUM of $148.8 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 24.0%, 14.7% and 13.9% allocation, respectively (as of Jan 9, 2018). The fund’s top three holdings are Apple Inc (NASDAQ:AAPL) , Microsoft Corporation (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) with 3.8%, 2.9% and 2.1% allocation, respectively (as of Jan 9, 2018). The fund has returned 23.5% in a year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: U.S. Listed ETFs Garner Record Inflows in 2017).

iShares MSCI Canada ETF (AX:EWC)

This is one of the most popular funds offering exposure to Canada. It is a perfect bet for those who are bullish on the overall performance of Canadian large-cap firms.

The fund manages AUM of $3.1 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.0%, 21.5% and 10.4% allocation, respectively (as of Jan 9, 2018). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.4%, 7.5% and 5.4% allocation, respectively (as of Jan 9, 2018). It has returned 14.0% in a year. EWC currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares MSCI Mexico Capped ETF EWW

This is one of the most popular funds offering exposure to Mexico. It is a perfect bet for those who are bullish on the overall performance of Mexican firms.

The fund manages AUM of $1.0 billion and charges 49 basis points in fees per year. Consumer Staples, Telecommunications and Financials are the top three sectors of the fund, with 25.7%, 16.4% and 15.1% allocation, respectively (as of Jan 9, 2018). From an individual holdings perspective, the fund has high exposure to America Movil, Fomento Economico Mexicano and GPO Finance Banorte, with 15.4%, 9.5% and 7.2% allocation, respectively (as of Jan 9, 2018). It has returned 20.4% in a year. EWW currently has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.

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