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Sector ETFs to Face Risk if Trade Talks Stall

Sanghamitra Saha

Global investors were their pinning hopes on higher-level trade talks this month. But the latest round of news, which says there was no sign of improvement in U.S.-China deputy-level trade talks, indicates the opposite. U.S. stock futures slipped in the after-hour session. The China delegation is reportedly sit for a meeting in Washington on Thursday only instead of Friday as scheduled, per CNBC.

Investors should note that the Trump administration blacklisted eight more Chinese technology giants on human rights’ concerns on Oct 7. This is the first time that the Trump administration has shown human rights as a reason for blacklisting companies. The previous exclusion of Huawei Technologies Co. was in interest of national security (read: Low-Beta ETFs to Tap Amid Stock Market Selloff).

Even if a partial trade deal is cracked, strategists say it’s also more likely now that the Trump administration will consent to a curtailed trade deal that could erase some tariffs before the year-end but postpone some of critical issues, such as intellectual property and technology transfers, for future talks.

However, the below-mentioned ETFs could be in danger amid half-hearted progress in trade talks.

Semiconductor

Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising trade tensions.

Chipmaker Qualcomm QCOM has 65% revenue exposure to China and Nvidia’s (NVDA) sales exposure to China is 56%, per Goldman Sachs. Apart from these, some other tech and semiconductor companies, which have sales exposure to China in the range of 22% to 55%, include the likes of Intel INTC, Micron Technology MU and Applied Materials AMAT. This clearly explains why the mood is somber in the semiconductor space. So, VanEck Vectors Semiconductor ETF SMH may face trouble.

Tech Hardware & Equipment

Tech companies that have extensive trade relations with China would be at high risk of falling prey to the trade war. In fact, Goldman Sachs has compiled a list of companies with considerable revenue exposure to China. These companies’ revenues are 14% exposed to China, per a CNBC article. SPDR S&P Technology Hardware ETF XTH should thus be followed carefully.

Auto

Both steel and aluminum are vital to the production of cars and trucks sold in America and would push up the sale prices of those vehicles considerably. Adding fuel to the ongoing trade tensions, the Trump administration has initiated a national security investigation into auto imports that may result in fresh tariffs.

U.S. auto companies earn about 12% revenues from China. With Beijing slamming tariffs on U.S. auto imports, First Trust NASDAQ Global Auto Index Fund CARZ would come under pressure.

Consumer Services

As tariff tensions heat up, inflation in the U.S. economy should perk up. Along with most market watchers, we too believe that companies will try to pass on some cost escalation to consumers. Higher inflation will hurt iShares U.S. Consumer Services ETF IYC. In any case, U.S. consumer services have about 10% sales exposure to China. That is yet another risk to consumer funds.

Agriculture Business

China targets imports of U.S. agricultural products as a way of retaliation, building pressure on agriculture equipment makers Deere & Co. DE and AGCO Corp. AGCO. AGCO has about 10% exposure to IQ Global Agribusiness Small Cap ETF CROP while Deere has considerable focus on iShares MSCI Global Agriculture Producers ETF (VEGI), First Trust Indxx Global Agriculture ETF FTAG and VanEck Vectors Agribusiness ETF MOO.

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QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
 
First Trust NASDAQ Global Auto Index Fund (CARZ): ETF Research Reports
 
SPDR S&P Technology Hardware ETF (XTH): ETF Research Reports
 
VanEck Vectors Agribusiness ETF (MOO): ETF Research Reports
 
iShares U.S. Consumer Services ETF (IYC): ETF Research Reports
 
VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports
 
AGCO Corporation (AGCO) : Free Stock Analysis Report
 
Deere & Company (DE) : Free Stock Analysis Report
 
Intel Corporation (INTC) : Free Stock Analysis Report
 
Micron Technology, Inc. (MU) : Free Stock Analysis Report
 
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
 
First Trust Indxx Global Agriculture ETF (FTAG): ETF Research Reports
 
IQ Global Agribusiness Small Cap ETF (CROP): ETF Research Reports
 
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