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5 ETF Zones to Take Shelter From Trade War

Sweta Killa

Trade war is playing foul in the stock market over the past month. It took an ugly turn on Aug 23 with the tit-for-tat tariffs between the United States and China. China plans to impose new tariffs of 5%-10% on $75 billion worth of imported goods from the United States.

The bulk of the Chinese tariffs will take effect on Sep 1, while the rest of the duties will be effective Dec 15. The increased duties will be levied on more than 5,000 U.S. products including agricultural goods, aircraft and crude oil. Also, a 25% tariff on U.S. automobiles and auto parts, which were suspended this year in the wake of trade talks, will be reinstated on Dec 15. China’s move came in retaliation to President Donald Trump’s proposed 10% tariff on an additional $300 billion in Chinese goods to be imposed on Sep 1 though some of these were delayed until December (read: ETFs Winners & Losers Halfway Through Q3).

In a counter attack, Trump raised tariffs on $550 billion worth of Chinese goods. Existing 25% tariffs are expected to increase to 30% effective Oct 1 and planned 10% tariffs on a further $300 billion in Chinese goods will be raised to 15% in two stages - Sep 1 and Dec 15. Additionally, Trump ordered U.S. companies to look at alternative ways to make their products in the United States and close operations in China.

The tariff hike will hurt U.S. consumers, pushing up the prices of goods, thereby curtailing spending. It will further impact worldwide economy and corporate profits, particularly at big U.S. exporters. All these will continue to weigh on the stock market and could disrupt global supply chains. In fact, worsening trade spat between the two largest economies has sparked fears of an imminent recession.

Market Impact

The Dow Jones and S&P 500 dropped 2.4% and 2.6%, respectively, while Nasdaq shed 3% Crude oil also dropped as additional China tariff will further weaken oil demand. As a result, the latest move in trade war led to higher demand for safe-haven avenues or lower risk securities. Below we have highlighted five such zones and their popular ETFs where investors could stash their money in an escalating trade war.

Gold - SPDR Gold Trust ETF GLD

Gold is viewed as a safe haven in times of economic or political turmoil. The escalating tension has raised the appeal for the bullion as a store of value and hedge against market turmoil. As such, the ultra-popular product tracking this bullion like GLD could be an interesting pick. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $41.6 billion and heavy volume of nearly 9 million shares a day. It charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Gold ETF Inflows Hits 6-Year High: How to Go Long).

Long-Dated Treasury - iShares 20+ Year Treasury Bond ETF TLT

The products tracking the long end of the yield curve often provide a safe haven. TLT provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $16 billion and average daily volume of 9.6 million shares. Expense ratio comes in at 0.15%. The fund has a Zacks ETF Rank #3 with a High risk outlook (read: Play the Bond Bull Market With These ETFs).

Low Volatility - iShares Edge MSCI Min Vol USA ETF USMV

These products have the potential to outpace the broader market in the event of a turmoil, providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. While there are several options, USMV with AUM of $32.2 billion and average daily volume of 3.9 million shares is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Low Volatility ETFs for Turbulent Times).

Dividend - Vanguard Dividend Appreciation ETF VIG

The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth like VIG seem to be good picks. The ETF has AUM of $36.3 million and trades in volume of 855,000 shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Dividend ETF Hits New 52-Week High).

Defensive - Invesco Defensive Equity ETF DEF       

Investors could rotate into defensive sectors like utilities, healthcare and consumer staples, which generally outperform during periods of low growth and high uncertainty. DEF seems an excellent choice as this offers exposure to companies having potentially superior risk-return profiles during periods of stock market weakness, while still offering the potential for gains during periods of market strength. The fund has accumulated $237.9 million in its asset base and sees lower volume of 15,000 shares per day on average. It charges 59 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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