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3 Ways to Minimize Your Exposure to the U.S.-China Trade War

Will Ashworth

Citigroup (NYSE:C) just slashed Apple’s (NASDAQ:AAPL) iPhone sales in half as a result of the U.S./China trade war. It seems more and more companies are getting caught in the crossfire. Whether buying goods from China or trying to sell products to China, navigating this trade war is a real difficulty.

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Meanwhile, investors of all stripes are trying to figure out how to best insulate their portfolios from what’s quickly becoming a global economic contagion.

Is it even possible to hide from this trade war in which no one wins? Probably not.

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However, I’ve got three ideas for minimizing your exposure.

Buy Service-Oriented Stocks

The argument for buying service-oriented stocks, especially those focused on the domestic market, is that they have far less exposure to trade policy. Naturally, most people immediately think of smaller companies, but that doesn’t have to be the case.

Sectors that come to mind include healthcare, utilities, software, real estate, etc.

For example, although Amazon’s (NASDAQ:AMZN) ecommerce business would be affected by the trade war, its AWS segment, which generated $2.2 billion of operating income in the quarter ended March 31 from $7.7 billion in revenue, wouldn’t face nearly the same tariff concerns.

In Q1 2019, its North American operating segment generated about the same amount of operating income from almost five times as much revenue. Although Amazon’s doing a lot more third-party selling these days, whether its Amazon or the third party that owns the product, the trade war isn’t helping their businesses.

So, Amazon’s a good, if not great way to minimize the trade war headwinds.

Another possibility is to buy healthcare businesses that have a strong services component like hospital operators, healthcare plan providers, retirement and assisted living facilities, etc.

In mid-April, I suggested that those who had the stomach start buying UnitedHealth (NYSE:UNH) stock despite the calls for “Medicare for All” because whatever the future holds for the provider of healthcare benefits and services, its stock has got to be worth more than $220.

UNH stock bottomed in mid-April and has rebounded by more than 10% in the six weeks since. With the trade war hanging over our heads, a stock like UNH wouldn’t be half bad.

Alternatively, if you don’t want to go the stock selection route, a good option would be to buy iShares Healthcare  Providers ETF (NYSEARCA:IHF), a collection of stocks targeting domestic healthcare services companies like UnitedHealth, which is the ETFs number one holding with a weighting of 22.94%.  

Boring but Consistent

With an ongoing trade war possibly leading to a recession, the best stocks to buy in this situation might be the most boring. Stocks that deliver consistent dividends or distributions and aren’t necessarily affected by what’s happening on the trade front.

Two sectors that meet these criteria are real estate and utilities.

Real estate, especially if you’re investing in multi-family residential, is an area that’s not going to suffer nearly as much from a downturn because we all have to live somewhere. Utilities benefit from the same scenario; we all need to pay our bills if we want to keep the lights on and the home appliances and electronics running smoothly.

That’s why Elizabeth Warren popularized the 50/20/30 budgeting rule, which puts aside 50% of your after-tax income for bills that you absolutely must pay.

Rather than pick the real estate or utilities stocks to own, it would be much easier to buy two inexpensive ETFs to meet your needs.

I’d go with iShares Residential Real Estate ETF (NYSEARCA:REZ) for the real estate play. Approximately 49% of its net assets are invested in residential REITs with the remainder in REITs that own retirement homes, storage facilities and other specialized real estate assets.

It charges 0.48% annually.  

As for utilities, I’d go with Vanguard Utilities ETF (NYSEARCA:VPU).

It’s inexpensive at 0.10% and only has 68 holdings with its top ten accounting for 53% of the ETFs $4.8 billion in total net assets.   

Park Your Money

If you’re freaked out by the consequences of a lingering trade war, you can always move your portfolio out of equities and into a certificate of deposit or high-yield savings account until the skirmish is settled.  

Or, you can buy into the MNA IQ Merger Arbitrage ETF (NYSEARCA:MNA), an expensive ETF at 0.78% annually that’s worth every penny. I first suggested the ETF in September 2017.  

Utilizing a directional hedge fund strategy, it has very little correlation to either the equity or fixed income markets, making it the perfect fund to own when both types of securities are losing their value.

It’s not going to make you rich, but in my opinion, it will protect your downside better than most bond funds would.

Alternatively, you could invest in one of the many special purpose acquisition companies (SPAC) currently listed, preferably one that’s gone public in the last 3-6 months.

That’s because SPAC’s are blind pools of money raised to use for an acquisition at some point in the 21 months after an IPO. The funds are placed in escrow and interest is paid until a target company is found to acquire. If a target’s not found, the funds are returned to investors with interest.   

It’s an excellent way to park your funds with minimal downside and potential upside should an acquisition come to pass before the 21-month deadline.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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