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Sector ETFs to Watch Out for Until Phase-2 Trade Deal

Sanghamitra Saha

While the United States and China are set to sign the phase-one trade deal, worries over existing tariffs have taken centerstage. The phase-one trade deal announced in the fourth quarter of 2019 witnessed a suspension in new tariffs on $160 billion in Chinese-made consumer electronics and toysas well as a reduction by half of the existing U.S. tariffs on $120 billion of other goods to 7.5%.

In return, China has vowed to purchase $200 billion of American goods over the next two years: $50 billion worth of energy, $40 billion in agriculture, $35-40 billion in services and $75 billion of manufactured products (mostly cars and aircraft), per the South China Morning Post, as quoted on time.com.

However, the United States has kept 25% tariffs on $250 billion of other Chinese goods in place. Also, market watchers are of the view that Trump may re-impose tariffs if the China fails to meet its huge import targets (read: After a Solid 2019, 5 China ETFs to Keep Rallying in 2020).

Against this backdrop, we highlight a few sector ETFs that should be watched closely.

Consumer

U.S. companies have paid $46 billion in tariffs since the start of the trade war. Per an analysis done by the Tax Foundation, tariffs would lower GDP and wages, “cut employment by the equivalent of 79,000 fewer full-time jobs in the long run, and “make the U.S. tax burden less progressive”,as quoted on S&P Global.

Companies normally try to pass on some cost escalation to their consumers. This in turn pushes up inflation. With a major section of tariffs still in place, iShares U.S. Consumer Services ETF IYC should be tracked closely.

Energy

Investors need to watch the progression in the sector. While the phase-one trade deal may goad China to import more U.S. oil, Donald Trump’s levy of tariff on steel and aluminum imports is a pain for U.S. oil pipeline companies as it pushed up their raw material prices.

U.S. energy companies have about 14% exposure to China. Notably, following President Trump’s March 22, 2018 signing of an executive memorandum to impose regulatory tariffs, company-level probability of default (PD) for the U.S. energy sector jumped 25.15% to 195 bps within just one week. All these data explain how vulnerable the sector is to trade tensions. Energy Select Sector SPDR ETF XLE and Alerian MLP ETF AMLP should be watched closely.

Auto

Both steel and aluminum are vital to the production of cars and trucks sold in America and would considerably push up the sale prices of those vehicles. U.S. auto companies earn about 12% revenues from China. China initially increased the tariffs on U.S.-made automobile imports from 15% to 40% in retaliation to U.S. tariffs, though suspended the same later as a goodwill gesture.

Now, with Washington trying to make China buy more cars under the phase-one trade deal, First Trust NASDAQ Global Auto Index Fund (CARZ) should now get some relief. Tesla (TSLA) has considerable exposure to China and its performance and developments there should be closely monitored (read: Ride on Tesla's Hottest Run With These ETFs).

Homebuilders

In any case, the sector is guilty of higher home prices. With several building materials still facing 25% tariff increase, cost of homes should likely remain elevated. According to the NAHB, the U.S.-China trade war has affected $10 billion worth of goods used in the homebuilding industry. However, low levels of U.S. mortgage rates have offered buyers the ability to cope with the price rise. SPDR S&P Homebuilders ETF XHB thus grabs attention (read: Bet on Favorite Sector ETFs & Stocks This Earnings Season).

Industrials & Materials

This area has the most to do with trade tensions as a huge set of industrial products, materials and chemicals are still facing inflated tariffs. This could keep funds like Industrial Select Sector SPDR Fund XLI and Materials Select Sector SPDR Fund XLB in an edgy position till the U.S. presidential election this year.

Tech Hardware & Semicoductors

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.

Along with tech, there are semiconductors, which probably have “the highest revenue exposure to China at 52%.” VanEck Vectors Semiconductor ETF SMH may continue to face troubles if there is a flare-up in tensions.

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Materials Select Sector SPDR Fund (XLB): ETF Research Reports
 
VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports
 
SPDR S&P Technology Hardware ETF (XTH): ETF Research Reports
 
iShares U.S. Consumer Services ETF (IYC): ETF Research Reports
 
Industrial Select Sector SPDR Fund (XLI): ETF Research Reports
 
Energy Select Sector SPDR Fund (XLE): ETF Research Reports
 
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
Alerian MLP ETF (AMLP): ETF Research Reports
 
First Trust NASDAQ Global Auto Index Fund (CARZ): ETF Research Reports
 
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