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Tariffs Likely to Dent US Earnings: ETFs in Focus

Sanghamitra Saha
Sun Life Financial (SLF) is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat.

The year 2018 was all about tariff talks and trade war tensions. The United States and China targeted $50 billion worth of goods for import tariffs, while the Trump administration disclosed another list of tariffs on $200 billion worth of Chinese goods. Now President Trump intends to enact tariffs on all $505 billion of Chinese goods imported into the United States — the dollar value of U.S. imports from China in 2017 (read: China's Likely Retaliation to US Tariffs & Its Impact on ETFs).

Plus, the Trump administration imposed a 25% tariff on steel imports and 10% on aluminum imports from some countries. Though negotiation talks are still on as “President Donald Trump said that the U.S. and the EU should drop all tariffs, barriers and subsidies,” if we go by an article published on Bloomberg, the tariffs are likely to result in an increase in raw material cost for manufacturers that use these metals (read: Trump Tariffs Put These Sector ETFs & Stocks in Focus).

Against this backdrop, Goldman Sachs said that if "tensions spread" and a 10% tariff was enacted on all U.S. imports, it would cut its 2019 EPS estimate by 15% to $145 a share. Goldman economists now allocate a 60% probability that the United States will impose tariffs on the recently targeted imports from China, per CNBC.

Goldman Strategies went on to say that “the United States, which already imposed tariffs on $79 billion of goods and services and proposed an additional $702 billion on other foreign goods, is on track to levy taxes on 27 percent of all imports.”

However, like many other analysts and investors, Goldman noted that strategies like investing in companies with higher domestic sales will likely to be in trend as long as the trade tensions persist.

Against this backdrop, we have highlighted a few earnings-based ETFs (covering all three-spectrum small, medium and large) and their performances this year.

WisdomTree U.S. Earnings 500 Fund EPS : It offers exposure to the broad U.S. large-cap companies that are profitable. The top three stocks are Apple (5.25%), Microsoft Corp (2.28%) and JPMorgan Chase (2.50%). The fund charges 28 bps in fees. Information Technology (25.36%), Financials (19.55%) and Healthcare (13.28%) round out the top three sectors. The fund is down 2.1% in the past six months (as of Jul 24, 2018)

WisdomTree U.S. MidCap Earnings ETF EZM:  In this mid-cap earnings-focused ETF, Park Hotels & Resorts (2.24%), Macy's (1.12%) and Penn National Gaming (1.05%) hold the top three spots. Consumer Discretionary (23.24%), Industrials (18.11%) and Financials (16.26%) are three of the leading holdings in the fund. The fund charges 38 bps in fees.The fund lost about 1% in the past six months.

WisdomTree U.S. SmallCap Earnings ETF EES:  This earnings-weighted fund's top three holdings are Kemet Corp (1.57%), Match Group (1.51%) and Warrior Met Coal (1.23%). The fund charges 38 bps in fees. Financials (20.85%), Consumer Discretionary (19.55%) and Industrials (18.89%) are the leading sectors of the fund. The fund added 5.9% in the past six months.

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