U.S. Markets closed

Phase-One Trade Deal to Boost These ETF Areas

Sanghamitra Saha

The long-awaited phase-one trade deal between the United States and China was signed on Jan 15. The 86-page agreement was the result of almost two years of relentless negotiations. The deal, announced in the fourth quarter of 2019, effectuated a suspension in new tariffs on $160 billion of China-made consumer electronics and toys as well as a reduction by half in the existing U.S. tariffs on $120 billion of other goods to 7.5%.

In return, China has vowed to purchase additional $200 billion of American goods over the next two years — $52.4 billion worth of energy, $32 billion in agriculture, $37.9 billion in services and $77.7 billion of manufactured products. The incremental purchases were add-ons to the 2017 U.S. export numbers (read: Sector ETFs to Watch Out for Until Phase-2 Trade Deal).

Below we show the break-up of China’s purchase of American goods and services over the next two years (source: CNBC).

Against this backdrop, we highlight how the ETF world would benefit from China’s promised purchases.

Agriculture

Per CNBC, agriculture purchases would include soybeans, wheat, corn, cotton, flour, honey and swine meat. Notably, China purchases about half of the soybean produced in the United States and is the second-largest buyer of American cotton. At the start of the trade war, agricultural products like yellow and black soybean faced a 25% retaliatory tariff from China. As China’s tariffs directly hit the U.S. farm belt last year, agricultural ETFs now have every reason to gain ahead.

Teucrium Soybean ETF SOYB, Teucrium Wheat Fund WEAT and Invesco DB Agriculture DBA are some of the funds that would be hogging the limelight now (read: Do Agriculture ETFs Make a Right Investment Choice for 2020?).

Energy

China has promised to buy more U.S. energy products like liquified natural gas, petroleum oil, methanol and coal etc. The news probably drove the stock ofCheniere Energy Inc. (LNG), the largest U.S. LNG exporter, by 2.2% on Jan 16. The stock has decent exposure to VanEck Vectors Energy Income ETF EINC and American Energy Independence ETF USAI. Other key U.S. LNG stocks like ExxonMobil XOM and Chevron CVX have a solid exposure to iShares U.S. Energy ETF IYE.

Manufacturing

Assured Chinese purchases for this segment include steam turbines, nuclear reactors, refrigerators, insulated wire, antibiotics as well as iron and steel products. This could do some good to Industrial Select Sector SPDR Fund XLI and Materials Select Sector SPDR Fund XLB.

Services

American services that have to be bought by China are education-related travel, financial services, reinsurance, insurance, could computing services, telecom services. Financial ETFs like iShares U.S. Insurance ETF IAK look good following the promise.

China is one of the biggest holders of U.S. Treasuries, possessing about $1 trillion of bonds in 2017, according to the Federal Reserve. While China started offloading U.S. treasuries in the past two years, the phase-one trade deal should put an end to it and benefit iShares 20+ Year Treasury Bond ETF TLT.

First Trust Cloud Computing ETF SKYY, which has a Zacks Rank #2 (Buy), also tends to benefit from the ramp-up in purchases of cloud computing services (read: 5 Tech ETFs Riding High on Iran Tensions).