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Tense About Trade War? Follow Goldman With 5 ETF Strategies

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After a great start of the year 2019, volatility started creeping into Wall Street and is now looming large. A dovish Fed seems of little help as the U.S.-China trade crisis has deepened. SPDR S&P 500 ETF SPY, Invesco QQQ Trust QQQ and SPDR Dow Jones Industrial Average ETF (DIA - Free Report) have lost about 3.7%, 6.3% and 4.4%, respectively, in the past month (as of May 23, 2019) (read: 5 ETFs to Hedge Against Market Volatility).

The Trump administration lifted tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10 and China announced a retaliatory move —- a tariff hike on $60 billion worth American goods to 25%, starting Jun 1. President Donald Trump is also considering additional tariffs on an incremental $325 billion of Chinese imports (read: Full-Blown Trade Spat: 5 Most-Vulnerable Sector ETFs & Stocks).

Not only this, Washington has forbidden U.S. firms from doing business with Chinese giant Huawei, citing national security concerns. On May 23, the U.S. Commerce Department said that it was proposing a new rule to implement anti-subsidy duties on products from countries that undervalue their currencies against the U.S. dollar, another move that could undermine Chinese trade.

Investors are worried about the fact that the trade war may last much longer than anticipated. Against this backdrop, it would be prudent to take a look at the investing areas that have less exposure to trade war risks and stay safe.

Goldman Sachs has listed some areas. If you want to follow the investment bank, you can apply their suggestions with the following investment strategies.

Bet Blindly on Dividend Growers

Dividend aristocrats are dividend-paying companies, which have a long history of raising dividend payouts year over year. These provide hedge against economic uncertainty and are high-quality in nature. The S&P 500 Dividend Aristocrat index has historically outperformed the S&P 500 index with lower volatility over a longer period of time.

So, one can play funds like Proshares S&P 500 Dividend Aristocrats ETF (NOBL) and SPDR S&P Dividend ETF (SDY) (read: 3 Dividend Growth ETFs & Stocks to Counter Looming Volatility).

Tap Companies With Lower Labor Costs

Companies with low labor costs should be better positioned than Goldman. These companies include Facebook FB and Google parent Alphabet GOOGL. Like many other investment houses such as Goldman, we too believe that services companies are generally less susceptible to tariffs compared with goods companies. 

So, Facebook-and-Alphabet-heavy ETFs like Communication Services Select Sector SPDR Fund XLC, Fidelity MSCI Communication Services Index ETF FCOM and Vanguard Communication Services ETF (VOX) should serve investors on this regard.

Telecom & Utilities: Free From Trade Risks

Several companies are not exposed to duties at all including utility and telecom companies, per David Kostin, Goldman Sachs chief U.S. equity strategist. Moreover, a dovish Fed and volatile equity market will likely keep the benchmark U.S. treasury yield at low levels. This should be beneficial for rate-sensitive sectors like telecom and utilities.  Utilities Select Sector SPDR Fund XLU yields 3.04% annually.

High-Yield Investments A Good Exposure Too

Who can forget high-yield ETFs? High-yield products go a long way in keeping investors’ portfolio safe if there is any capital loss. Global X SuperDividend Alternatives ETF (ALTY, which yields 7.04% annually, can be tapped for gains.

Tap Small-Cap ETFs

Per Goldman, “70% of the revenues of U.S. companies are domestic, so while tariff is an issue, it’s concentrated in some industries and some sectors than others.”

Since small-cap stocks and ETFs are exposed to domestic economy, one can bet on the small-cap ETFs. Invesco S&P SmallCap Consumer Staples ETF PSCC, IQ US Real Estate Small Cap ETF ROOF (yields 6.38% annually), ProShares Russell 2000 Dividend Growers ETF SMDV and Invesco S&P SmallCap Utilities ETF (PSCU) should be good bets (read: Small-Cap Q1 Earnings Dull: 5 Better-Performing Sector ETFs).

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