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4 Sector ETFs to Profit from if Geopolitics Rule

Sanghamitra Saha

With the global market wavering on geopolitical uncertainties, investors must closely be eyeing the sectors to invest in. Doldrums in the Middle East following the U.S. airstrike on Syria government’s airbase in response to a chemical attack by the latter on dozens of citizens, deployment of a strike group by the U.S. navy to the Korean Peninsula, a series of terrorist attacks in Europe and the French presidential election flared up geopolitical concerns (read: 3 Low Volatility ETFs to Buy if Global Tensions Flare Up).

The U.S. air strike in Syria has complicated relations between Moscow and Washington as Russia is an ally of the Syrian president Bashar al-Assad. Russia has already criticized the U.S. air strike as "aggression against a sovereign state in violation of the norms of international law." So, now, the risk of a U.S.-Russia clash has increased. Not only Russia, Iran – another supporter of Syria government – boosted military support for the Assad regime. 

Now comes North Korea, which has been launching ballistic missiles lately to express its resentment over annual military drills between the U.S. and South Korea. North Korea views these drills as trials before an attack.

North Korea’s recent missile launches on test purpose triggered concerns over safety in peripheral countries. Washington now looks extremely eager to warn North Korea against its nuclear activities by launching a navy strike group.

Below we highlight those sectors and the related ETFs which may be played if geopolitical tensions continue to remain in the limelight. These ETFs have beaten the S&P 500-based SPY, Nasdaq-100-based QQQ and the Dow Jones-based DIA.

Defense

Any kind of warfare or military strikes mean increased purchases and usages of weapons. This benefits the defense and aerospace industry. Plus, President Trump called for a 10% or $54 billion boost in U.S. military spending. Congress will have to pass this spending bill latest by April 28. As a result, the operating environment is pretty hot for aerospace and defense ETFs likeiShares US Aerospace & Defense ITA and SPDR S&P Aerospace & Defense ETF XAR (read: Trump's Defense Spending Plans Make these ETFs Buys Again).

Consumer Staples

The consumer staples sector has been an area to watch lately as markets are volatile leading investors to bet big on defensive sectors like consumer staples. The sector enjoys a few benefits at this moment. Greater spending power in the wake of improving wage growth as well as still-low energy prices from the historical standard is helping the consumer segment.

Moreover, the sector offers a decent dividend yield which is needed in the present low-yield environment. As long as geopolitical tensions rule the market, consumer staples is likely to outperform, thanks to its non-cyclical nature.

So, investors can have a look at First Trust Consumer Staples AlphaDEX Fund FXG, PowerShares DWA Consumer Staples Momentum Portfolio ETF PSL and Guggenheim S&P 500 Equal Weight Consumer Staples ETF RHS for further gains.

Oil/ Energy

Oil – the most mystifying commodity at this moment as investors strive to understand its future course – finally got a boost from geopolitics. The closing of Libya’s largest oil field after an unidentified group blocked a pipeline and the Syria attack triggered concerns over global crude supply for the near term.

As a result, oil futures logged a five-day winning streak on April 10. This happened despite surging U.S. rig count. WTI crude ETF United States Oil USO added about 6.3% in the last five days (as of April 10, 2017) (read: How to Trade Oil with ETFs After Surging U.S. Output).

So, the energy sector can be considered for short-term gains should geopolitical tensions continue. For this, investors may try SPDR S&P Oil & Gas Equipment & Services ETF XES, iShares U.S. Oil Equipment & Services ETF IEZ and VanEck Vectors Unconventional Oil & Gas ETF FRAK.

Utilities

The utility sector is considered one of the safe sectors and comes across as one of the best equity picks when the market is tumultuous. Plus, the sector normally offers strong dividend yields and performs better in a low-rate environment as it requires a huge debt for its operations (read: Utility ETFs Always a Safe Option for the Investors).

Now, higher safe haven demand dragged down U.S. Treasury yields on April 10. This opened up room for higher-yielding utility ETFs. Also, Trump’s promise of higher infrastructure spending is a positive for the fund.

PowerShares S&P SmallCap Utilities Portfolio ETF(PSCU), John Hancock Multifactor Utilities ETF JHMU and Reaves Utilities ETF UTES are some of the utility ETFs that can be played.

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SPDR-DJ IND AVG (DIA): ETF Research Reports
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
ISHARS-US OIL E (IEZ): ETF Research Reports
 
FT-CONSUMR STP (FXG): ETF Research Reports
 
ISHARS-US AEROS (ITA): ETF Research Reports
 
GUGG-SP5 EW C S (RHS): ETF Research Reports
 
VANECK-UNC O&G (FRAK): ETF Research Reports
 
SPDR-SP O&G EQP (XES): ETF Research Reports
 
REAVES UTIL ETF (UTES): ETF Research Reports
 
SPDR-SP AER&DEF (XAR): ETF Research Reports
 
PWRSH-DW CON ST (PSL): ETF Research Reports
 
JH-M-F UTIL (JHMU): ETF Research Reports
 
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