It is easy to think that the ill effects of the trade war between the U.S. and China are limited to those countries. After all, the S&P 500 fell 5.67% in May while the MSCI China Index was more than twice as bad, plunging 12.74% last month.
Unfortunately for investors considering international equities and exchange-traded funds (ETFs), the White House is not limiting its tariff efforts to China. Last month, the White House boosted tariffs on $200 billion worth of Chinese goods to 25% from 10%, but that is not the end of the U.S. tariff list.
Rather, the President Donald Trump Administration is targeting other countries with tariffs, including some major developing economies — explaining in large part why the MSCI Emerging Markets Index fell 6.63% in May.
For investors looking to steer clear of tariff-related controversy, these might be some of the international ETFs to avoid over the near-term.
ETFs to Avoid: iShares MSCI Mexico ETF (EWW)
Expense Ratio: 0.47% per year, or $47 on a $10,000 investment.
One of the primary reasons stocks plunged in the final trading session of May was news that the White House is targeting Mexico, the largest trading partner of the U.S., with a slew of fresh tariffs. That sent the iShares MSCI Mexico ETF (NYSEARCA:EWW) lower by 3.6% on volume that was more than double the daily average. That was this international ETF’s worst one-day performance in six months.
On a standalone basis, tariffs are usually controversial, but those aimed at Mexico are even more so. While Mexico enjoys geographic proximity to the U.S., the world’s largest economy, the White House views that trading relationship as uneven. Additionally, the tariff action against Latin America’s second-largest economy takes on added controversy because the Trump Administration is essentially saying these tariffs are the result of Mexico’s unwillingness to help with the illegal immigration crisis.
EWW is the largest dedicated Mexico fund, and there may be some near-term hope for this international ETF.
“Mexico’s president on Saturday hinted his country could tighten migration controls to defuse U.S. President Donald Trump’s threat to impose tariffs on Mexican goods, and said he expected ‘good results’ from talks planned in Washington next week.,” according to Reuters.
VanEck Vectors Gaming ETF (BJK)
Expense Ratio: 0.66%
With the bulk of its holdings being domestic casino operators and companies with exposure to Macau, the VanEck Vectors Gaming ETF (NYSEARCA:BJK) may not appear to be the type of international ETF that could be stymied by tariff talk. But price action suggests otherwise, as BJK tumbled nearly 11% in May.
Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM) are all Las Vegas-based companies, but each has a footprint in Macau, the only Chinese territory where gambling is legal. Proving that exposure to China is problematic when the country is at odds with the U.S., Las Vegas Sands and Wynn fell an average of 22.5% last month, putting the two largest U.S casino operators by market value in bear markets.
Bottom line: If the tariff war between the world’s top two economies keeps gamblers away from the tables in Macau, BJK has the makings of international ETF that is poised to languish over the near-term.
Vanguard FTSE Europe ETF (VGK)
Expense Ratio: 0.09%
Yes, the Vanguard FTSE Europe ETF (NYSEARCA:VGK) is a cheap ETF. And yes, this international ETF performed less poorly than the S&P 500 in May. Even with those positive traits, this international ETF could be vulnerable to more near-term downside if the U.S. decides to explore a new theater in the trade war. That theater being Europe.
President Trump has overtly used harsh rhetoric against some European companies. For example, he has said that automotive trade imbalances favoring Europe are threatening U.S. automakers. The president is also pushing the European Union (EU) to take more agriculture from U.S. farmers, something the EU is balking at.
“Countries like France and Belgium have also balked at joining talks because of the Trump administration’s refusal in 2017 to sign a global pact on climate change,” reports The New York Times. “And leaders of the Green coalition in the European Parliament have said they will not sign trade agreements with countries that have not ratified the climate accord.”
Bottom line: The EU and the U.S. could very well be the next chapter in the trade conflict, and that is likely to be bad news for developed-market international ETFs, such as VGK.
iShares MSCI India ETF (INDA)
Expense Ratio: 0.68%
The iShares MSCI India ETF (CBOE:INDA) and other India funds were stars among international ETFs last month, as stocks in Asia’s third-largest economy rallied following the reelection of Prime Minister Narendra Modi. While Indian equities look good compared to the broad emerging markets complex, there is significant trade war risk with the U.S. here.
Last week, the White House removed India’s special trade status, a policy that kept billions of dollars of Indian imports to the U.S. away from tariffs.
“I have determined that India has not assured the United States that India will provide equitable and reasonable access to its markets,” President Donald Trump said in a statement issued by the White House.
Today, India loses its status as a beneficiary developing country. Time will tell if that move by the U.S. hampers India ETFs.
VanEck Vectors Steel ETF (SLX)
Expense Ratio: 0.56%
The VanEck Vectors Steel ETF (NYSEARCA:SLX) is a reverse tariff play. The U.S. steel industry was one group that actually benefited from tariffs, but in a recent sign of some willingness to make trade concessions, the White House lifted tariffs on Canadian and Mexican steel imports.
While not an international ETF, SLX predictably reacted adversely to that news. The steel ETF is down almost 13% in the current quarter and resides almost 30% below its 52-week high, putting the fund deep into bear market territory. Analysts are sounding bearish tones on domestic steel stocks, including some residing in SLX.
Last week, Deutsche Bank lowered its ratings on Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) to “hold” from “buy” while hitting US Steel (NYSE:X) with a “sell” rating. But SLX could be reinvigorated when Trump hits the 2020 campaign trail in earnest, assuming he again promises to protect domestic steel producers.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
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