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Tensions between Washington and Beijing are easing, with signs of negotiations between China and the United States relating to trade. The nations are looking to come to an agreement to prevent long lasting damage to the global economy.
President Donald Trump’s proposal to impose tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products did not go down well with traders. China retaliated with prospective tariffs on $3 billion worth of U.S. imports. As a result, global stock markets declined sharply last week, owing to fears of an all-out trade war hampering market recovery (read: Trump Tariffs: ETF Winners & Losers).
However, Treasury Secretary Steven Mnuchin told Fox news that he is hopeful of the United States reaching a deal with China to work on the huge trade deficit. As a result, the Dow Jones industrial average rose 2.8% in a broad-based rally to close at 24,203. Moreover, Standard & Poor's 500 increased 2.7% and the technology heavy Nasdaq gained 3.3%.
What the Markets Think?
Following the latest developments in the space, investors are now betting on the proposed tariffs as mere negotiation tactics. A war can never be won, because of the everlasting damage it does to both parties. Wall Street thinks denying cheaper goods to consumers will do more harm than good and that free trade will be better for all (read: ETFs to be Impacted by Trump's Tariff Exemptions).
"There's too much at stake," per a USA Todayarticle citing Joe Quinlan, chief market strategist at U.S. Trust. "Policy markers understand that the best and fastest way to harm their constituents is to start a trade war and deny voters low-cost goods produced from around the world while tanking global financial markets," Quinlan added.
“This declaration of tariffs on the president’s part was his typical opening salvo into a negotiation process,” per a TIME article citing Randy Frederick of Charles Schwab. “He’s done these things in the past, and now it looks like the markets are telling us, ‘Yep, that’s what’s happening,'” he added.
The numbers also support this move as being a mere negotiation tactic. The United States imported $506 billion worth of goods from China in 2017 and Trump proposed tariffs on merely $60 billion worth of goods. Per a Capital Economics analysis, even if the tariffs are imposed, targeting $60 billion worth of imports will have a negligible impact on the Chinese economy as it contributed to merely 0.25% of China’s GDP in 2017.
Let us now discuss a few ETFs likely to benefit from reduced tensions between the two countries.
The tech sector is heavily dependent on China in terms of their revenue percentage. For instance, per an ejinsight article, Apple earned around 20% of its total revenue from China in the last fiscal quarter. XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $20.2 billion and charges a fee of 13 basis points a year. Apple Inc (AAPL - Free Report) , Microsoft Corp (MSFT - Free Report) and Facebook Inc are the top three holdings of the fund, with 14.1%, 11.3% and 6.5% allocation, respectively. The fund has returned 28.1% in a year and 4.7% year to date.
iShares U.S. Aerospace & Defense ETF (ITA - Free Report)
Per Office of the United States Trade Representative, the aerospace sector exported $15 billion worth of goods to China in 2016. This fund seeks to provide exposure to the Aerospace and Defense industry. It has AUM of $5.8 billion and charges a fee of 44 basis points a year. Boeing (BA - Free Report) , United Technologies Corp and Lockheed Martin Corp (LMT - Free Report) are the top three holdings of the fund, with 10.4%, 7.5% and 7.4% allocation, respectively. ITA has returned 37.1% in a year and 6.5% year to date.
First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)
Per Office of the United States Trade Representative, the auto sector exported $11 billion worth of goods to China in 2016. This fund focuses on providing exposure to the global automotive sector. It has AUM of $20.0 million and charges a fee of 70 basis points a year. Daimler AG, Toyota Motor Corporation and Honda Motor Co., Ltd. are the top three holdings of the fund, with 8.0%, 7.8% and 7.7% allocation, respectively. The fund has returned 14.6% in a year but has lost 3.3% year to date.
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ETFs to Buy as Trade War Fears Abate
Tensions between Washington and Beijing are easing, with signs of negotiations between China and the United States relating to trade. The nations are looking to come to an agreement to prevent long lasting damage to the global economy.
President Donald Trump’s proposal to impose tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products did not go down well with traders. China retaliated with prospective tariffs on $3 billion worth of U.S. imports. As a result, global stock markets declined sharply last week, owing to fears of an all-out trade war hampering market recovery (read: Trump Tariffs: ETF Winners & Losers).
However, Treasury Secretary Steven Mnuchin told Fox news that he is hopeful of the United States reaching a deal with China to work on the huge trade deficit. As a result, the Dow Jones industrial average rose 2.8% in a broad-based rally to close at 24,203. Moreover, Standard & Poor's 500 increased 2.7% and the technology heavy Nasdaq gained 3.3%.
What the Markets Think?
Following the latest developments in the space, investors are now betting on the proposed tariffs as mere negotiation tactics. A war can never be won, because of the everlasting damage it does to both parties. Wall Street thinks denying cheaper goods to consumers will do more harm than good and that free trade will be better for all (read: ETFs to be Impacted by Trump's Tariff Exemptions).
"There's too much at stake," per a USA Today article citing Joe Quinlan, chief market strategist at U.S. Trust. "Policy markers understand that the best and fastest way to harm their constituents is to start a trade war and deny voters low-cost goods produced from around the world while tanking global financial markets," Quinlan added.
“This declaration of tariffs on the president’s part was his typical opening salvo into a negotiation process,” per a TIME article citing Randy Frederick of Charles Schwab. “He’s done these things in the past, and now it looks like the markets are telling us, ‘Yep, that’s what’s happening,'” he added.
The numbers also support this move as being a mere negotiation tactic. The United States imported $506 billion worth of goods from China in 2017 and Trump proposed tariffs on merely $60 billion worth of goods. Per a Capital Economics analysis, even if the tariffs are imposed, targeting $60 billion worth of imports will have a negligible impact on the Chinese economy as it contributed to merely 0.25% of China’s GDP in 2017.
Let us now discuss a few ETFs likely to benefit from reduced tensions between the two countries.
Technology Select Sector SPDR Fund (XLK - Free Report)
The tech sector is heavily dependent on China in terms of their revenue percentage. For instance, per an ejinsight article, Apple earned around 20% of its total revenue from China in the last fiscal quarter. XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $20.2 billion and charges a fee of 13 basis points a year. Apple Inc (AAPL - Free Report) , Microsoft Corp (MSFT - Free Report) and Facebook Inc are the top three holdings of the fund, with 14.1%, 11.3% and 6.5% allocation, respectively. The fund has returned 28.1% in a year and 4.7% year to date.
iShares U.S. Aerospace & Defense ETF (ITA - Free Report)
Per Office of the United States Trade Representative, the aerospace sector exported $15 billion worth of goods to China in 2016. This fund seeks to provide exposure to the Aerospace and Defense industry. It has AUM of $5.8 billion and charges a fee of 44 basis points a year. Boeing (BA - Free Report) , United Technologies Corp and Lockheed Martin Corp (LMT - Free Report) are the top three holdings of the fund, with 10.4%, 7.5% and 7.4% allocation, respectively. ITA has returned 37.1% in a year and 6.5% year to date.
First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)
Per Office of the United States Trade Representative, the auto sector exported $11 billion worth of goods to China in 2016. This fund focuses on providing exposure to the global automotive sector. It has AUM of $20.0 million and charges a fee of 70 basis points a year. Daimler AG, Toyota Motor Corporation and Honda Motor Co., Ltd. are the top three holdings of the fund, with 8.0%, 7.8% and 7.7% allocation, respectively. The fund has returned 14.6% in a year but has lost 3.3% year to date.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>