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Trump's Tariff Threat Put Trade Talks at Risk: ETFs to Buy

Sweta Killa
Hopes of trade talks between the United States and China seem to be waning as Trump intends to go ahead with its planned tariffs of about $200 billion on Chinese imports.

Hopes of trade talks between the United States and China seem to be waning as Trump intends to go ahead with its planned tariffs of about $200 billion on Chinese imports for which the public comment period ended last week, per the Wall Street Journal. The tariff is expected to be around 10% instead of the previous expectation of 25% floated by the Trump administration and will likely come as early as Monday.

This time, Trump is targeting various Internet technology products and other electronics, printed circuit boards and consumer goods ranging from handbags to bicycles and furniture.

While both sides are slated to meet later this month to dial back on trade tensions, Trump’s move may cease the discussions altogether. It could spark fresh retaliation from Beijing, resulting in an escalation of a trade war. China had previously vowed to hit back with tariffs on another $60 billion of U.S. exports, including meat, coffee, furniture and auto parts if Trump slaps tariff on $200 billion in Chinese goods (read: Trade-Sensitive Sector ETFs & Stocks to Watch on Talk Hopes).

China has put off accepting license applications from American companies in financial services and other industries looking to operate in there. The country is also seeking permission from the World Trade Organization (WTO) to impose $7 billion a year in sanctions on the United States in retaliation to Washington’s non-compliance with a recent ruling over U.S. dumping duties.

The new round of Trump’s tariff would be in addition to $50 billion that is already in place with a 25% duty. China has retaliated with tariffs of equivalent amount of U.S. exports. Apart from this, Trump also threatened the third round of tariffs on another $267 billion of Chinese imports on a short notice, which would mean levying duties on nearly everything China exports to the United States.

The fading prospect of trade talks, which had rekindled investors’ interest to risky assets last week, will again lead to higher demand for safe-haven avenues or lower-risk securities. Below we have highlighted six such zones and their popular ETFs where investors could stash their money amid the ongoing trade war.

Low Volatility - iShares Edge MSCI Min Vol USA ETF USMV

Low volatility ETFs have the potential to outpace the broader market in bearish market conditions or in an uncertain environment, 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. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets.

While there are several options, USMV with AUM of $16.8 billion and average daily volume of 1.6 million shares is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Here's Why Low Volatility ETFs Will Outperform in September).

Defensive - Invesco 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 it offers exposure to 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. The fund has accumulated $193.1 million in its asset base and sees lower volume of 10,000 shares per day on average. It charges 60 bps in fees per year and has a Zacks ETF Rank #3 with a Medium risk outlook.

Gold - SPDR Gold Trust ETF GLD

Though gold is generally perceived as a safe haven in times of economic or political turmoil, the long-standing trade gyrations have prompted investors to pick the U.S. dollar as the latest safety investment in a strong economy. Still, the ongoing tariff threats could result in a solid bargain opportunity in gold and act as a store of value and hedge against market turmoil. The ultra-popular product tracking this bullion like GLD could be an interesting pick in 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 an ultra-popular gold ETF with AUM of $28.7 billion and heavy volume of nearly 6.4 million shares a day. It charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 ETF Areas Investors Keep Away From).

Long-Dated Treasury - iShares 20+ Year Treasury Bond ETF TLT

Though the fund has been out of investors’ favor this year due to rising yields and has an unfavorable Zacks ETF Rank #4 (Sell) with a High risk outlook, the deepening turmoil between the two countries could bring some relief. This is because the products tracking the long end of the yield curve often provide a safe haven. TLT provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $9.3 billion and average daily volume of 7.2 million shares. Expense ratio comes in at 0.15% (read: Treasury ETFs Surge Amid Turkey Crisis).

Dividend - Vanguard Dividend Appreciation ETF VIG

The dividend-paying securities are the major sources of consistent income for investors, when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth like VIG seem to be good picks. The ETF has AUM of $30.5 billion and trades in volume of 624,000 shares a day on average. It charges 8 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Dividend ETF Hits New 52-Week High).

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GOLD (LONDON P (GLD): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
GUGG-DEF EQUITY (DEF): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
ISHARS-20+YTB (TLT): ETF Research Reports
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