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Trade-Sensitive Sector ETFs & Stocks to Watch on Talk Hopes

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Concerns over Trump’s protectionist trade stance have been playing foul in the stock market. In fact, the escalation of the President’s tariff threat on additional Chinese goods led to a tumultuous Wall Street ride last week. However, the negative sentiments seem to be reversing, given the hopes of fresh talks between the United States and China (read: 5 Inverse Leveraged ETFs Off to a Strong Start in September).

China has welcomed Trump’s invitation to resume trade talks in order to avert a full-blown trade war. The two countries have already placed new taxes on $50 billion in imports on each other’s goods. Washington is preparing to impose 25% duty on $200 billion of Chinese goods, targeting a broad array of Internet technology products and consumer goods from handbags to bicycles to furniture. Further, Trump also threatened to implement tariffs on additional $267 billion of goods on a short notice.

China has vowed to retaliate and put off accepting license applications from American companies in financial services and other industries hoping to operate in the country. The country is also seeking permission from the World Trade Organization (WTO) to impose $7 billion a year in sanctions on the United States in retaliation to Washington’s non-compliance with a recent ruling over U.S. dumping duties.

Given this, the news of fresh trade talks has instilled optimism into the stock market. This coupled with booming economy and strong earnings will help stocks to move higher. The U.S. economy is witnessing the fastest pace of growth in nearly four years with a nearly two-decade low unemployment rate of 3.9% and 18-year high consumer confidence. Historic tax cuts, higher government spending and deregulation are fueling growth.

Additionally, the Fed is on track for gradual rate hikes with the third increase of this year expected as soon as this month. A rising rate scenario also signals a strengthening economy, which will spur growth in the stock market (read: September Rate Hike Odds Rise: Top Sector ETF & Stock Picks).

While most corners of the market are set to surge, the sectors at risk due to China trade will likely benefit the most. The U.S. information technology, materials, and industrials sectors have relatively high exposure to China's economy with 14.2%, 7.1%, and 5.6%, respectively, and are poised to perform well in renewed trade talks. In particular, chip stocks dominate the list of tech sector players with large sales exposure to China.

Below, we have highlighted a few ETFs and stocks from these sectors that are expected to outperform at least in the near term following fresh U.S.-China trade talks:


VanEck Vectors Semiconductor ETF (SMH - Free Report) :
This fund provides exposure to 25 securities by tracking the MVIS US Listed Semiconductor 25 Index. It has higher concentration on the top two firms with 9% of assets while others hold no more than 6.1% share. The product has managed assets worth $973.5 million and charges 35 bps in annual fees and expenses. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Semiconductor ETFs in Trouble?).

Qorvo Inc. (QRVO - Free Report) : This is a provider of technologies and RF solutions for mobile, infrastructure and aerospace/defense applications. It has 75% exposure to China sales. The stock has seen positive earnings estimate revision of 73 cents over the past 90 days for the fiscal (ending March 2019) and has an estimated earnings growth rate of 29.50%. Qorvo has a Zacks Rank #2 and a VGM Score of B.


Invesco Global Agriculture ETF : This product offers exposure to the largest, most liquid, globally traded companies involved in agriculture and farming-related activities. It follows the NASDAQ OMX Global Agriculture Index, holding 50 stocks in its basket. None of the securities holds more than 9.25% share. The fund has accumulated $20.2 million in its asset base and charges 77 bps in annual fees.

Deere & Company (DE - Free Report) : This is an American corporation that manufactures agricultural, construction, and forestry machinery, diesel engines, drivetrains used in heavy equipment, and lawn care equipment. It has seen negative earnings estimate revision of 16 cents for the fiscal (ending October 2018) over the past 90 days but is expected to generate growth of 42.22%. Deere is at the most disadvantageous position amid the tit-for-tat tariff threats on agricultural products as it would reduce demand for the related machines. The stock has a Zacks Rank #3 (Hold).


Industrial Select Sector SPDR (XLI - Free Report) :
This is the most popular ETF in the industrial space with AUM of $13.3 billion. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with each accounting for less than 8% of the assets. More than one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 13 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Industrial Output Slows Down in July: 4 Solid ETFs & Stocks).

The Boeing Company (BA - Free Report) : This is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. Boeing's sales in China accounted for 15% of its total revenues in 2017. The stock has seen negative earnings estimate revision of 6 cents for this year over the past 90 days but has an expected growth rate of 21.51%. Being carries a Zacks Rank #3 and has a VGM Score of A.

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