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One ETF For Wal-Mart's Mexico Woes (WMT, EWW)

April 23, 2012 11:02 am
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Shares of Dow component Wal-Mart (NYSE: WMT), the world’s largest retailer, are off almost 4.5% in early trading Monday, an uncharacteristic move for a stock that is normally viewed as a stodgy blue chip, following an article in the New York Times over the weekend that said the Arkansas-based company blocked an internal investigation into bribery allegations regarding its Wal-Mart de Mexico business.

Not surprisingly, analysts and traders have opined that Wal-Mart’s stock could be in for a tumble on the news, especially because the stock has posted an increase of about 17% in the past year before the start of trading Monday.

However, the real selling pressure appears to be accumulating in Wal-Mart de Mexico, also known as Walmex. Mexico’s largest retailer, which is 69% owned by Wal-Mart, has traded down by as much as 15% today to 36.50 pesos on the Bolsa Mexicana, wiping out the stock’s year-to-date gain.

The glum action in Walmex is weighing on the iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW) as well. The lone ETF devoted exclusively to Mexico allocates 11.61% of its weight to Walmex, making the stock EWW’s second-largest holding behind America Movil (NYSE: AMX).

EWW could be in for more pain as eager hedge funds took Walmex from the short side. Market experts said it is the retail giant’s less visible Mexican unit that could be the more attractive target for short sellers, according to Reuters.

The Times article points out that in September 2005 a high-ranking Wal-Mart lawyer was notified by a former Walmex executive regarding bribes used to expedite store openings in Mexico. The company has about 2,000 stores in Mexico. While it is believed Wal-Mart will conduct a legitimate investigation into the Walmex/bribery matter, that investigation could lead to a wider probe, take years and prompt fines from U.S. and Mexican regulators.

The longer Walmex imbroglio drags on and the longer it appeals to traders as a short, the longer the iShares MSCI Mexico Investable Market Index Fund remains in focus. EWW, which is home to 45 stocks and $1.25 billion in AUM, is up 11.1% year-to-date. That’s a better performance than the Vanguard MSCI Emerging Markets ETF (NYSE: VWO), but it’s only good for a middling performance among the largest country-specific Latin America ETFs.

While EWW has outpaced the iShares MSCI Brazil Index Fund (NYSE: EWZ), the Mexico fund is also lagging the iShares MSCI Chile Investable Market Index Fund (NYSE: ECH), the iShares MSCI Peru All Capped Index Fund (NYSE: EPU) and the Global X FTSE Colombia 20 ETF (NYSE: GXG).

EWW’s chart is cause for concern and should support at $58 be violated, that could portend a move to $56. On the other hand, Wal-Mart’s Mexico trials and tribulations may could create an interesting, not-so-negative scenario for EWW: Traders that are short Walmex may opt to hedge those positions by establishing long positions in EWW because it’s a large, liquid fund.

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