ETFs To Watch Out For On NAFTA Talks

The year 2018 has seen increased optimism with regard to the trilateral NAFTA deal between the United States, Mexico and Canada. However, the recent developments have not been very encouraging for Canada and Mexico, which are likely to suffer irrevocable damage if the NAFTA deal fails.

President Trump has threatened to pull out of the NAFTA deal if Mexico does not take strict action against the flow of drugs and immigrants into the United States. Although it is not certain if the United States will quit NAFTA even if Trump gives the required six months’ notice, the prospect of the United States withdrawing from the trade pact has rattled investors.

Investors Remain Cautious

Since mid-2017, the parties to the NAFTA deal have held seven rounds of talks. With elections scheduled in Mexico later this year and a reshuffle in the United States congress, U.S. trade officials will likely want to come to a consensus with regard to NAFTA soon (read: Country ETFs to be Impacted by Trump's Tariff Plans).

An uncertain political environment will not be favorable for NAFTA negotiators. However, latest threats from Trump have rattled NAFTA optimists. “They must stop the big drug and people flows, or I will stop their cash cow, NAFTA. Need Wall!” Trump tweeted on Apr 1.

A potential notice of withdrawal would further invite opposition from the Congress and Trump is expected to face court challenges for his decision. However, a potential exit is bad news for the Mexican and Canadian economies, as 80% of total exports of Mexico went to the United States in 2017. Moreover, 75% of Canadian exports were to the United States in the year.

Bulk of U.S. trade deficit with Mexico comes 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.

“Mexico has got to help us at the border,” per a Bloomberg article citing Trump’s statement to reporters outside the Bethesda-by-the-Sea Episcopal Church in Florida. “If they’re not going to help us at the border it’s a very sad thing,” he added.

Although U.S. trade representatives have showed optimism concerning the deal, the Canadian counterparts have not shared the positivity. "I'm hopeful. I think we are making progress. All three parties want to move forward,'' U.S. trade representative Robert Lighthizer told CNBC earlier last week. However, Steve Verheul, Lighthizer’s Canadian counterpart was quick to respond, stating ''We've got quite a bit of work to do yet, actually,” when asked about the prospects of an immediate deal.

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 $140.3 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposure to Information Technology, Financials and Health Care with 24.8%, 14.7% and 13.7% allocation, respectively. The fund’s top holdings are Apple Inc (NASDAQ:AAPL) , Microsoft Corporation (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) with 3.8%, 3.1% and 2.6% allocation, respectively. The fund has returned 14.0% in a year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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 $2.6 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top sectors of the fund, with 42.5%, 20.2% and 10.6% allocation, respectively. 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%, 7.9% and 5.5% allocation, respectively. It has returned 4.1% in a year. EWC 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 an ideal choice for those who are upbeat about the overall performance of Mexican firms.

The fund manages AUM of $1.1 billion and charges 49 basis points in fees per year. Consumer Staples, Telecommunications and Financials are the top sectors of the fund, with 25.8%, 17.4% and 16.0% allocation, respectively. From an individual holdings perspective, the fund has high exposure to America Movil, Fomento Economico Mexicano and GPO Finance Banorte, with 16.4%, 8.7% and 7.4% allocation, respectively. It has returned 1.6% in a year. EWW has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.

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