The tension between the United Stated and North Korea is escalating, sparking off economic retaliation. This is especially true, as President Donald Trump has threatened to slap a trade embargo on countries that do business with North Korea in his latest tweet. The tweet says: “The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.”
The tweet came after North Korea tested its sixth and the most powerful nuclear weapon to date in the weekend, prompting the United States to warn of a "massive military response" if it or any of its allies are threatened (read: North Korea's Nuclear Test Drives Safe Haven ETFs Higher).
Potential Targets of Trade Ban
The threat seems focused largely on China, North Korea's largest trading partner, which accounts for about 90% of the rogue nation’s trade volume. This is because the relationship between America and China is already stressed with Trump repeatedly hitting the country for not being tough enough on North Korea.
As the United States and China engages in hundreds of billions of dollars worth of trade each year, the trade restriction would result in a war, causing massive turmoil in the U.S. economy thereby leading to a global repercussion. Global research house Capital Economics estimated that if United States stops buying goods from China altogether, it would cost the country some 3% of GDP. Additionally, Australia would be hit hard by the China-U.S. trade war, as both countries are its largest trading partners (read: Trump Takes First Step Toward Trade War? ETFs to be Impacted).
Apart from these, India, Russia and Pakistan are the major trading North Korean partners and also have strong bilateral ties with the U.S. An end of trade with all these countries could lead to a global recession.
Though Trump’s threat seems unrealistic, we have highlighted five ETFs that are expected to hurt most from Trump’s trade ban with North Korean partners:
IShares China Large-Cap ETF (FXI - Free Report)
This fund provides exposure to a basket of 52 Chinese large cap stocks by tracking the FTSE China 50 Index. It is concentrated on its top four holdings with nearly 33% of total assets. In terms of sector holdings, financials dominates the fund with 53.2% share while energy, telecom and information technology provide a decent mix in the portfolio. The product is extremely popular and liquid with AUM of $3.5 billion and trading in volumes of about 14 million shares a day. It charges 74 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares MSCI Australia ETF (EWA - Free Report)
This fund is the most popular and liquid ETF tracking the Australian equity market with AUM of $1.8 billion and average daily volume of more than 2 million shares. It tracks the MSCI Australia Index and holds 71 stocks in its basket with a double-digit allocation to the top firm. Other firms hold less than 8.3% share in the basket. From a sector look, financials dominates the fund’s returns at 41.5% followed by materials (17.1%). It charges 48 bps in annual fees and a Zacks ETF Rank #3 with a Medium risk outlook (read: Australia's Consumer Confidence Lower: ETFs in Focus).
iShares MSCI India ETF (INDA - Free Report)
This ETF provides targeted exposure to the Indian stock market. It follows the MSCI India Total Return Index and charges 71 bps in fees per year from investors. Holding 79 stocks in its basket, the fund is highly concentrated on the top two firms that collectively make up for 16.8% share. Other firms hold less than 6% share. Further, the product is slight tilted toward financials at 23.5% of assets while computers-software, consumer discretionary, energy and materials round off the next spots taking double-digit allocation each. INDA is the largest and popular ETF in this space with AUM of $5.3 billion and average trading volume of more than 2.7 million shares a day. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
VanEck Vectors Russia ETF (RSX - Free Report)
This product track the MVIS Russia Index, which includes publicly traded companies that are incorporated in Russia or outside Russia but have at least 50% of their revenues/related assets in Russia. Holding 31 securities in its basket, the fund is heavily concentrated on the top 10 holdings with 60.1% of total assets. In terms of sectors, energy dominates the fund’s returns with more than one-third of the portfolio while materials, financials and consumer staples round off to the next three spots with a double-digit allocation each. RSX has amassed $1.9 billion in its assets base while trades in average daily volume of 7.4 million shares. The expense ratio comes in at 0.65%. The fund has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
Vanguard Total World Stock ETF (VT - Free Report)
With AUM of nearly $9 billion, this ETF offers exposure to both the developed and developing economies by tracking the FTSE Global All Cap Index. It is one of the low cost choices in the space charging 11 bps in fees per year and trades in good volume of 831,000 shares. The fund holds a broad basket of 7845 stocks with each accounting for no more than 1.6% share. North American firms take the top spot at 55.2% while Europe and the Pacific region make up for 21.1% and 14.2%, respectively. Financials, technology, consumer discretionary, industrials and healthcare are the top five sectors. VT has a Zacks ETF Rank #3 with a Low risk outlook (see: all the World ETFs here).
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