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Consumer ETFs in Focus on Fresh Tariff Threats

Sanghamitra Saha

Though Trump’s new round of tariffs on some consumer goods imported from China has been pushed back to December, the long-term impact of the same would be critical. An analysis by J.P. Morgan’s chief equity strategist Dubravko Lakos-Bujas indicated “that two-third of the products to be hit by the impending round of tariffs are concentrated in the technology and consumer discretionary sectors of benchmark stock indexes,” as quoted on MarketWatch. According to a report by UBS, hardline and grocery retail will be hit the hardest this time.

The average American household will likely lose about $1,000 per year due to the newest round of tariffs on Chinese goods, according to J.P. Morgan. The research house estimates that the average annual tariff cost per household will rise from $600 from the first two rounds of tariffs, per CNBC. The new tariffs are slated to take place on Sep 1 and in mid-December.

This is because Trump has pushed back his Sep 1 deadline for 10% tariffs on many Chinese imports, and delayed duties on cellphones, laptops and other consumer goods, in order to avoid hurting U.S. holiday sales. The United States Trade Representative office noted that new tariffs on certain consumer items would be held off until Dec 15 (read: Trump Brings Holiday Cheer for Consumer & Tech Stocks & ETFs).

Retailers will try to pass on some burden of the higher costs to consumers, thereby raising prices. This is likely to bump up inflation levels in the U.S. economy. Higher inflation in turn will give a boost to bond yields. This would increase consumers’ outlays and hurt ETFs.

Dubravko Lakos-Bujas noted that unlike the agriculture sector, which is benefiting from government subsidy to counterbalance some of the tariffs, “there is no simple way to compensate consumer.”

Given the adverse impact on the wallet of U.S. consumers going into the 2020 election, Dubravko Lakos-Bujas indicated that the administration may rollback tariffs or negotiate on a trade agreement, per CNBC.

ETFs in Focus

Against this backdrop, we highlight a few consumer ETFs, namely, Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR, Fidelity MSCI Consumer Discretionary Index ETF FDIS, SPDR S&P Retail ETF XRT and Invesco S&P 500 Equal Weight Consumer Discretionary ETF RCD. These ETFs lost around 0.94% to 3.4% in the past week (as of Aug 20, 2019).

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Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
 
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
 
SPDR S&P Retail ETF (XRT): ETF Research Reports
 
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
 
Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD): ETF Research Reports
 
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