- This fund tracks the MSCI Mexico Investable Market Index, but seeks 2x leveraged return as well as an inverse performance to the underlying index
- So, as the index rises or falls on a daily basis, SMK moves in the opposite direction and seeks twice the return. Crucially, because the fund is rebalanced daily, its price can deviate significantly from the index value in what is called “path dependency.”
- To accomplish its investing goals, the fund uses derivatives such as swaps as well as some cash assets. Some of the holdings in the underlying index are Grupo Mexico, Grupo Elektra and America Movil.
- UMX has all of the same characteristics as SMK, the only difference being that UMX is not an inverse ETF.
- SMK and UMX movie in opposite directions, but both seek a 2x leveraged return on the MSCI Mexico Investable Market Index.
- Not to be forgotten, UMX—like SMK—exhibits path dependency, wherein the ETF price and its index value can diverge significantly.
- DBMX tracks the same index as these other ETFs, but additionally hedges its exposure to Mexico’s peso.
All these ETFs, particularly EWW from iShares, and DBMX—its currency-hedged cousin from Deutsche Bank—are effective tools to access these positive changes in Mexico’s economy.
It’s a trend, as the above data suggest, that looks likely to have some staying power.
The leveraged plays are there to be explored as tactical tools, though at Cougar, we do not use any leveraged ETFs in our models.
At the time of publication, Cougar held a position in EWW on behalf of clients. Contact Deborah Frame at [email protected].
Cougar, founded by Dr. James Breech, is a Toronto-based money management firm that uses only ETFs in its top-down global asset allocating strategies. Breech launched Cougar in 1993 around a downside risk management system he created. Contact Cougar Global at 800-387-3779 or [email protected].
Deborah Frame is vice president of Investments and chief compliance officer at Cougar Global Investments, a Toronto-based global tactical ETF portfolio strategist. She heads up the research team at Cougar Global, including macroeconomic, market environment and asset class correlation research used in the firm’s qualitative and quantitative asset allocation models that focus on downside risk optimization and the use of ETFs.