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Trump Widens North Korea Sanctions: ETFs in Focus

Sweta Killa
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Following the threat to “totally destroy” North Korea early this week, President Donald Trump stepped up its rhetoric by imposing a new round of sanctions against North Korea. This time, he put a ban on international banks from the American market if they facilitate transactions with North Korea.

The sanction also allows the U.S. Treasury Department to freeze the assets of individuals or companies that support North Korea's textile, fishing, information technology and manufacturing industries. Additionally, it bars aircraft, ships and vessels that visit North Korea or engage in ship-to-ship transfers with another ship that has visited North Korea for 180 days. Trump said the move would reduce the sources of revenues that fund North Korea's deadliest weapons (read: ETFs to Lose If Trump Bans Trade With North Korean Partners).

The latest move was in line with the previous attempts to persuade the Kim government to end its threatening nuclear missile development program in exchange for sanctions relief, economic aid, and security guarantees.

Earlier Sanctions

Last week, North Korea was hit by a set of United Nations sanctions including a ban on all North Korean textile exports, a ban an on condensates and natural gas liquids, a cap of two million barrels a year on refined petroleum products, a cap on crude oil exports to North Korea at current levels and ban on countries hiring new North Korean workers. These sanctions will likely wipe out $1.3 billion combined from Pyongyang’s revenues, causing a severe setback to the rogue nation and its ability to pursue nuclear and ballistic missile programs.

In early August, United Nations Security Council imposed tough sanctions to ban North Korean exports of coal, iron, lead, and seafood that are expected to slash its $3 billion annual export revenues by a third. The sanctions also prohibit countries from increasing the current number of North Korean laborers working abroad; ban new joint ventures with North Korea; and put an embargo on any new investment in the current joint ventures. The State Department also prohibited U.S. citizens from traveling to North Korea effective Sep 1.

All these suggest no fear of nuclear war anytime soon but the sanctions might hurt many corners of the economy in the United States and internationally, especially China. Given this, a few ETFs were severely impacted by the new sanctions while a few will likely gain. Below are four ETFs that are especially volatile in the wake of escalating North Korea tensions:

Global X China Financials ETF CHIX

Chinese banks are the most immune to the latest North Korean sanctions as they had $144 billion of assets in the United States at the end of December, according to data from the Federal Reserve. As such, CHIX offering concentrated exposure to the financial segment of Chinese equity market, might lose in the weeks ahead. It tracks the Solactive China Financials Total Return Index, holding 42 securities in its basket with heavy concentration on the top three firms, Industrial & Commercial Bank of China, AIA group and China Construction Bank, accounting for more than 9% share each. The fund has amassed $50.1 million in its asset base while trades in a light volume of 30,000 shares per day on average. It charges 65 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

SPDR Gold Trust ETF GLD

Wider North Korean sanctions could trigger further nuclear aggression from Pyongyang. In fact, the rogue regime intended to test the strongest hydrogen bomb ever in the Pacific Ocean. The intensifying tension has once again shaken the complacency in the stock market, compelling investors to dump riskier assets and take flight to safety at least for the near term. As such, gold, which is often viewed as a store of value and hedge against market turmoil, rebounded from a four-week low in early trading today. A product tracking this bullion like GLD could be an interesting pick to tap the same. It is the ultra-popular gold ETF with AUM of $35.6 billion and heavy volume of nearly 7.7 million shares a day. It charges 40 bps in fees per year from investors. The ETF has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 3 Reasons to Buy Gold ETFs Now).

iShares U.S. Aerospace & Defense ETF ITA

Growing tensions between North Korea and the United States are benefiting defense stocks and ETFs. ITA provides investors exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 39 stocks, the fund is highly concentrated on the top firm, Boeing BA, at 10.3% while other firms hold less than 7.9% share each. The fund has accumulated $4.4 billion in AUM while charging 44 bps in fees a year. Volume is good at around 217,000 shares. The ETF has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Beyond North Korea, 4 More Reasons to Buy Defense ETFs).

ProShares Short FTSE China 50 YXI

China is North Korea's largest trading partner and accounts for 83% of the rogue nation’s exports. The embargo will affect Chinese trading activities, which in turn would hurt the world’s second-largest economy. As a result, investors could go for an outright short bet on Chinese stocks via YXI. The find offers inverse exposure to the daily returns of the FTSE China 50 Index. It has a lower level of $6.1 million in AUM and trades in paltry average daily volume of 3,000 shares. YXI charges 0.95% in expense ratio.

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