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4 Defensive ETFs to Tackle Fed & Trade Tensions

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The month of August started to on an eventful note with the Fed keeping interest rates steady but hinting at more hikes and speculation that the Trump administration is considering a hike in tariffs from 10% to 20% on $200 billion worth of Chinese goods.

Inside the Headline Events

Given a solid U.S. economy’s growth momentum, the labor market’s well-being and an uptick in inflation, the Fed now appears on track to hike rates in September. After all, household spending and business fixed investment have been steady.

U.S. labor costs recorded their largest annual rise since 2008 in the second quarter. Overall, the U.S. economy grew 4.1% in Q2, representing the fastest pace of growth in nearly four years (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).

The U.S. central bank currently sees two more rate rises by the end of the year. Federal funds futures indicated that traders are pricing in about a 91% possibility of a rate hike in September and 71% chances of a hike in December, according to CME Group’s FedWatch program, per Reuters (read: Fed Turns Hawkish: ETF Areas to Win).

The immediate impact was felt in the bond market and the yield on 10-year U.S. Treasury increased to 3.00% on Aug 1 from 2.96% recorded the day earlier. iShares 20+ Year Treasury Bond ETF (TLT - Free Report) shed about 0.6% on Aug 1. Stocks were also mixed with SPDR S&P 500 ETF (SPY - Free Report) and SPDR Dow Jones Industrial Average ETF (DIA - Free Report) losing about 0.2% and 0.4% on Aug 1, respectively. Gradual ceases of cheap money inflows have probably weighed on stocks.

Trade Worries Flare Up

After slapping 25% tariffs on $50 billion worth of Chinese goods, U.S. President Donald Trump seeks to build more pressure on China. The administration is reportedly mulling over a 25% tariff on $200 billion worth of Chinese imports, up from the previously proposed 10%, per Reuters.

Morgan Stanley analysts estimate an 81-basis-point impact on global growth if there are 25% tariff hikes across all imports from China and Europe, with U.S. growth decelerating by 1.0 percentage point and China's by 1.5 points, per Reuters.

In such a scenario, if investors fear any kind of doldrums in the market, defensive ETFs like multi-asset or alternative products could be useful.

Below we highlight a few:

Invesco S&P 500 BuyWrite ETF (PBP - Free Report)

The underlying index measures total returns of a theoretical portfolio including the S&P 500 Index stocks on which S&P 500 Index call options are systematically written against the portfolio through a buy-write strategy. The product was up 0.05% and yields 3.13% annually.

YieldShares High Income ETF (YYY - Free Report)

The underlying ISE High Income Index comprises 30 closed-end funds (CEFs) ranked highest overall by the ISE in three criteria namely fund yield, discount to net asset value and liquidity. The fund yields about 8.52% annually. It gained about 0.2% on Aug 1 (read: Earn 5% Plus Yield With These ETFs).

ProShares Morningstar Alternatives Solution ETF (ALTS - Free Report)

The underlying Morningstar Diversified Alternatives Index provides diversified exposure to alternative asset classes while enhancing risk-adjusted portfolio returns when combined with a range of traditional investments. The fund yields 3.19% annually and was up 0.3% on Aug 1.

ProShares RAFI Long/Short (RALS - Free Report)

The underlying FTSE RAFI US 1000 Long/Short Total Return Index allocates an aggregate equal dollar amount to both long and short equity positions. The product added about 1.3% on Aug 1.

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