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Another ETF Victim Of The Trade Wars

ETF Professor

Trade war-related carnage is not limited to U.S. and China equities. Stocks in other countries are being pinched, too, including Mexico.

Equities in Latin America's second-largest economy were thumped last week amid news that the White House is targeting Mexico in a new round of new tariffs.

What Happened

Again, the fallout from tariff target was not confined to the targeted country. The U.S. is proposing tariffs on oil imported from Mexico that is sent to the U.S. to be refined, in part explaining why the VanEck Vectors Oil Refiners ETF (NYSE: CRAK) stumbled last week.

“A new tariff could disrupt the long-standing cross-border energy trade: Mexico sends 600K-700K bbl/day of oil to the U.S., mostly to refiners that process the crude into gasoline, diesel and other products, while Mexico buys more than 1M bbl/day of U.S. crude and fuel, more than any other country,” according to Seeking Alpha's Carl Surran.

Why It's Important

CRAK, which is nearly four years old, tracks the MVIS Global Oil Refiners Index. Several of the fund's marquee domestic holdings, such as Valero Energy Corp. (NYSE: VLO), have exposure to the U.S. Gulf Coast region, an area where refiners could be stung if the U.S. proceeds with the tariffs on Mexico's imported oil.

“A sharp decline in Mexican oil supplies could raise the costs of fuels if U.S. refiners are forced to buy heavier crude grades from further distances, adding to shipping costs; refiners have been using Mexican heavy crude grades in part to offset the loss of barrels from Venezuela, which has been under U.S. sanctions,” said Surran.

Analysts see CRAK components Phillips 66 (NYSE: PSX) and Marathon Petroleum Corp. (NYSE: MPC) as more insulated from the tariffs because those companies are not as dependent on the Gulf Coast Region as is Valero. Phillips 66 and Marathon combine for 13.57 percent of CRAK's weight.

What's Next

Residing almost 27 percent below its 52-week, CRAK is in a bear market, but some relief for the fund could arrive if the U.S. and Mexico can avoid an all-out trade conflict on par with what the U.S. has China. Nearly 70 percent of CRAK's 24 holdings are non-U.S. companies, but as the fund's recent price action suggests, it needs domestic refiners to contribute some upside.

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