After months of rhetorical tariff threats between Washington and Beijing, the world’s two largest economies have called a trade war. This is especially true as Trump’s 25% tariff threats on $34 billion in Chinese goods including auto, electric cars, aerospace, communications tech, new materials and robotics went into reality at 12:01 a.m. on Jul 6 and another $16 billion are expected to go into effect in two weeks.
The tariff came in response to the alleged theft of U.S. intellectual property and unfairly swelling America’s trade deficit.
China also hit back with the same scale and strength slapping levies on American goods targeting heartland staples like soybeans, corn, pork and poultry. The United States has violated World Trade Organization rules and ignited the largest trade war in economic history,” China’s Commerce Ministry said in a statement. With retaliation from Beijing, Trump will now seek to impose additional tariffs on $500 billion in Chinese goods (read: 5 Sector ETFs Most Exposed to Trade Tensions).
The latest move marked the escalation of the trade war from threat to reality and would result in a global recession. It would hurt global supply chains, increase costs for businesses and consumers and slow down investments.
If the situation worsens and turns out to be a full-blown trade war, it would bring disaster for the global stock markets, at least in the near term. Worries over trade are not limited to Beijing by any means though. A number of Asian stocks stand to lose a great deal in an escalating U.S.-China trade dispute. In fact, Asian shares logged in the worst first-half performance in five years while China’s mainland stock market entered into a bear territory, falling more than 20% from the February highs.
Europe, Mexico and Canada will also bear the brunt as these have already retaliated or have some countermeasures in place against the recent U.S. tariffs on steel and aluminum (read: How Europe ETFs are Susceptible to U.S.-China Trade Spat?).
Against such a backdrop, there are a few places where investors can stash their cash in the ETF world. Below, we highlight five ETFs that look to offer up stability or even profit as the trade tariff crisis continues to unfold:
SPDR Gold Trust ETF (GLD - Free Report)
In difficult market environments, gold is considered a great store of value and hedge against market turmoil. The ultra-popular GLD tracking the price of gold bullion measured in U.S. dollars has added 0.8% over the past week. However, the prospects of higher U.S. interest rates amid a strengthening economy and a strong dollar have been dulling the shine of the bullion.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report)
Concerns over a rate hike have plagued bond ETF investments this year, but rising trade war fears have raised the appeal for safe American bonds pushing the yields lower. The yield on 10-year Treasury dropped to 2.84% from its peak 3.09% hit in mid-May. The declining yield has further supported the rally in Treasuries. As the tariffs are fired from both sides, American investors will continue to pile up these ETFs. While there are many options in the space, TLT and other long-dated securities look to be the biggest winners. TLT gained 0.4% over the last week (read: Treasury ETFs Surging: 5 Best Performers).
iPath S&P 500 VIX Short-Term Futures ETN
The VIX is often known as the fear index as it surges when investors are skittish about the market’s current direction. Obviously this is the case right now and the ETN tracking this benchmark has gained lately. VXX is up double digits over the past month and a very liquid choice for traders seeking to make a bet on fear levels in the market. The trend is likely to continue in the present scenario. However, investors should note that volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost.
Invesco Defensive Equity ETF (DEF - Free Report)
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. It has gained 0.4% over the past week.
Vanguard Dividend Appreciation ETF (VIG - Free Report)
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 is crowded, ETFs with stocks having a strong history of dividend growth like VIG seem to be good picks. The fund added 0.9% over the past week (read: 7 Exciting ETFs Ways to Profit From Ongoing Trade Spat).
ProShares UltraShort MSCI EAFE (EFU - Free Report)
For investors seeking to make an outright bet against the global stocks, an inverse ETF could be the way to go. EFU offers two times (200%) the inverse (opposite) of the daily performance of the MSCI EAFE Index. The ETF gained nearly 9% in the past one month. While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesaw markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect.
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