Trade disputes between the United States and China reached a new height last week. Just as China announced a retaliatory tariff of more than $50 billion early last week to match the figure proposed before by the United States, President Trump announced on Thursday that he is mulling over an incremental $100 billion in tariffs on Beijing. If applied, the United States may target Chinese goods like furniture, clothing or shoes in its new round of tariffs (read: China's $50B Tariff Backlash Puts These ETF Areas in Focus).
Trump viewed the Chinese retaliation as unfair, and a direct hit on U.S. agriculture and manufacturing hard. However, Trump mentioned that the United States is open to discussions with so that he can “protect the technology and intellectual property of American companies and American people,” as quoted on nytimes.com.
Though the broader market slid with this news, with SPDR Dow Jones Industrial Average ETF (DIA - Free Report) losing about 2.4% on Apr 6, the market may recoup some losses as President Donald Trump said in a tweet on Apr 8 that he expects China to reduce trade barriers and not to respond to U.S. taxes.
Investors should note that U.S. tariffs are being announced to bring about changes in Chinese government policies “designed to transfer U.S. intellectual property to Chinese companies and allow them to seize leadership in key high-technology industries of the future.”
Adverse Impact of Trade War
Though the two parties have time to rethink the decision, as there is a 60-day public comment period before enactment, talks of fresh tariffs are sure to keep markets unsteady in the coming days.
First, tariff war, if it happens, will derail the global growth momentum. And a clash with China would “complicate geopolitical priorities given the Trump administration has enlisted the help of the Chinese in scheduling historic talks with North Korea next month,” as noted on nytimes.
According to National Retail Federation President and CEO Matthew Shay, “American families will be on the losing end,” if Chinese consumer products are targeted, as quoted on Reuters.
Any New Chinese Retaliation in Cards?
Notably, China registered a $375.2-billion trade surplus with the United States in 2017 and the Trump administration is persistently forcing China to reduce that enormous amount by $100 billion. Since China purchased only $130.4 billion worth of American goods in 2017 against U.S. purchase of $505.6 billion Chinese products, Beijing has lesser scope to hit back further.
Along with many analysts, we too believe that it would be tough for China to find more American goods to levy tariffs on. However, the nytimes article went on to explain that China may opt for other ways than tariffs, including curbing the operations of American banks and other service providers over there (read: China Tariffs Target US Farm Belt: Stocks and ETFs in Focus).
Safer ETFs to Play
Against this backdrop, investors can play the following ETFs to ride out the turbulent times. The following funds have beaten the SPDR S&P 500 ETF (SPY - Free Report) (down 4.9%) in the last one month, which was fraught with trade and tech risks.
iShares Global Utilities ETF (JXI - Free Report) – Up 3.5% in the last one month
As U.S. treasury yields, which was supposed to take a flight before, dived on trade war fears, rate-sensitive sectors like utility gained. In any case, the fund has 58% focus on America followed by 7.5% in the U.K., 6.2% in Spain and 5% in Italy. Since most developed economies are still practicing an easy money policy, JXI appears to be a winning pick. The fund yields 3.66% annually.
iShares Europe Developed Real Estate ETF IFEU">(IFEU) – Up 1.8%
The Europe-focused real estate fund is heavy on the U.K. (28.6%) and Germany (23.6%). France and Sweden take next two spots. A low-rate environment should favor this fund as well. It yields 3.57% annually.
PowerShares S&P SmallCap Low Volatility Portfolio (XSLV - Free Report) – Down 0.4%
As large-cap stocks with major international exposure are prone to risks amid a looming trade war, it is better to have a small-cap fund in your portfolio. Plus, a low volatility quotient to the fund is an added advantage.
Vanguard US Minimum Volatility ETF (VFMV - Free Report) – Down 0.4%
This active fund provides long-term capital appreciation with lower volatility relative to the broad U.S. equity market. So, investors still looking to play the broader U.S. market can consider the fund.
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