Trade War Fears Loom: Protect Your Portfolio With These ETFs

After grappling with inflation threats and the prospect of faster-than-expected rate hikes last month, the Wall Street is now facing with a fresh issue — a brewing global trade war. This is especially true as President Donald Trump is planning on imposing a series of tariffs on China imports, targeting the technology, telecommunications, and apparel sectors. This involves around $60 billion in goods from the world's second largest economy. Trump also intends to slap steep tariffs on steel and aluminum imports next week (read: Trump's Import Tariffs: ETF & Stocks in Focus).

The move could lead to retaliation from China, hurting a number of American companies. Boeing BA will likely be the first victim of the trade war as the aerospace giant is a top U.S. export to China. Notably, China will buy about $1 trillion worth of Boeing aircraft over the next 20 years. The Chinese government signaled that it would consider ordering Airbus planes instead of Boeing jets if the United States imposes the tariff. Apple AAPL and its suppliers will also take a hit.

Further, Trump administration is seeking to reduce the U.S. trade deficit with China by $100 billion. The United States had a record $375-billion trade deficit with China in 2017, while China reported a U.S. trade surplus of $276 billion.

Moreover, the replacement of Mike Pompeo with Rex Tillerson as Secretary of State added to the White House turmoil and renewed concerns over tensions between the U.S. and North Korea.

Market Impact

The recent events have made investors jittery, compelling them to dump riskier assets and take flight to safety at least for the near term. If trade protectionism converts into a trade war, it may be catastrophic for the stock market at least for the near term. According to Bloomberg Economics, a full-blown trade war could cost the global economy $470 billion. If the United States raises import cost by 10% and the rest of the world retaliates raising tariffs on U.S. exports, then the global GDP will drop 0.5% by 2020.

Against such a backdrop, investors could stash their cash in the following ETFs that offer stability or even profit as trade war threats keep everyone on their toes:

SPDR Gold Trust ETF GLD

Gold is often viewed as a store of value and hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick in the wake of the current market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $35.3 billion and heavy volume of nearly 7.4 million shares a day. It charges 40 bps in fees per year from investors. The product has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Safe Haven ETFs to Buy on Trump's Tariff Plans).

iShares Russell 2000 ETF IWM

Investors can also seek shelter in a basket of small-cap stocks that have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to trade war or any other political issues and could better insulate investors against Trump’s trade-protectionism policy. While the small-cap space is flooded with ETFs, the ultra-popular IWM having a Zacks ETF Rank #3 and a Medium risk outlook could be the best choice. It provides exposure to a broad basket of 1,958 stocks by tracking the Russell 2000 Index and charges 20 bps in expense ratio. The ETF has amassed $43.2 billion in its asset base and trades in heavy volume of 7.4 million shares a day on average (read: Focus on Small-Cap ETFs Amid Trade War Fears).

iShares 20+ Year Treasury Bond ETF TLT

The trade war threats have raised the appeal for the U.S. government bonds tracking the long end of the yield curve. These products, which often carry a safe haven status, could see a turn in their fate from the bearish trend seen so far this year. As such, the ultra-popular long-term Treasury ETF – TLT – seems a better pick at present despite its unfavorable Zacks Rank #4 (Sell). It tracks the ICE U.S. Treasury 20+ Year Bond Index and has AUM of $6.5 billion. Expense ratio comes in at 0.15% and average daily volume is also heavy at around 9.1 million shares. Holding 30 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 25.85 years and effective duration of 17.45 years (read: Prepare for Bond Bear Market With These ETFs).

Guggenheim Defensive Equity ETF DEF    

Investors could rotate into defensive sectors like utilities, healthcare, and consumer staples, which generally outperform during periods of low growth and high uncertainty. DEF seems an excellent choice as this offers exposure to the 98 companies having potentially superior risk-return profiles during periods of stock market weakness while still offering the potential for gains during periods of market strength. It follows the Guggenheim Defensive Equity Index, charging 61 bps in fees per year. The fund has accumulated $185.8 million in its asset base and sees lower volume of 15,000 shares per day on average. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares Edge MSCI Min Vol USA ETF USMV

Low volatility ETFs like USMV have the potential to outpace the broader market in bearish-to-neutral market conditions providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio, and thus lose less when the market is falling. USMV tracks the MSCI USA Minimum Volatility Index, holding 207 stocks in its basket. With AUM of $14.7 billion, the product charges 0.15% in expense ratio and trades in solid average daily volume of 1.7 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.

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