Trump Takes First Step Toward Trade War? ETFs To Be Impacted

President Donald Trump’s administration has taken an unconventional path to protectionism. It has launched a formal investigation into whether China is violating international trade laws relating to intellectual property rights.

The point here is that Trump’s administration and the United States business groups consider Chinese trade practices as damaging to the country’s industry. American businesses operating in China are forced to hand over key technological advances to China, while operating their businesses abroad.

The White House triggered section 301 of the Trade Act of 1974. This section specifically forces foreign countries to open up their markets to the United States exporters. It allows the United States to impose tariffs on imported goods from a foreign country or restrict access to domestic markets for goods from that country.

China has regarded this move as disappointing and harmful to bilateral relations. China’s Ministry of Commerce has said that a trade war would do harm to both parties and has expressed strong dissatisfaction toward United States Trade Representative Robert Lighthizer’s decision. Moreover, Chinese representatives have called their United States counterparts’ behavior irresponsible for using domestic laws to settle a dispute, while completely disregarding WTO rules.

Although the investigation would take more than a year, it marks the beginning of a potential trade war among the two countries.

This move is aimed at making life easier for American multinationals. What’s ironical is that Trump has spent most of his campaign speaking against American companies doing business abroad. Therefore, even if there is some fruitful outcome of this move, doing business abroad will be easier, thereby reducing U.S. jobs.

Let us now discuss a few United States industrials and Chinese ETFs that might be impacted by a potential trade war.

Industrial Select Sector SPDR Fund XLI

This fund is one of the most popular United States equity ETFs and focuses on providing exposure to the U.S. industrial sector.

It has AUM of $11.74 billion and charges a fee of 14 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Machinery take the top three spots, with 23.23%, 19.38% and 16.72% allocation, respectively (as of June 30, 2017). From an individual holdings perspective, the fund has high exposure to General Electric (NYSE:GE) , Boeing Co (NYSE:BA) and 3M Co (NYSE:MMM) with 7.11%, 6.30% and 5.64% allocation, respectively (as of August 22, 2017). The fund has returned 15.36% in the last one year and 9.34% year to date (as of August 22, 2017). XLI currently has a Zacks ETF Rank 3 (Hold) with a Medium risk outlook (read: ETFs in Focus Post General Electric Q2 Earnings).

Vanguard Industrials ETF (MC:VIS)

This fund has AUM of $3.4 billion and charges a fee of 10 basis points a year. From a sector look, Aerospace & Defense , Industrial Conglomerates and Industrial Machinery take the top three spots, with 21.5%, 17.2% and 10.6% allocation, respectively (as of July 31, 2017). From an individual holdings perspective, the fund has high exposure to General Electric, Boeing Co and 3M Co with 8.1%, 5.1% and 4.4% allocation, respectively (as of July 31, 2017). The fund has returned 13.60% in the last one year and 5.39% year to date (as of August 22, 2017). VIS currently has a Zacks ETF Rank 3 with a Medium risk outlook (read: US Industrial Production Misses Expectations: ETFs in Focus).

iShares China Large-Cap ETF (ST:FXI)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $3.37 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Telecommunication Services are the top three allocations of the fund, with 52.29%, 11.00% and 10.78% exposure, respectively (as of August 21, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp and China Mobile Ltd are the top three allocations of the fund, with 10.13%, 8.71% and 7.67% exposure, respectively (as of August 21, 2017). The fund has returned 23.97% year to date and 15.33% in the last one year (as of August 22, 2017). FXI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs to Buy On Alibaba (NYSE:BABA)'s Blowout Q1 Results).

iShares MSCI China ETF MCHI

This fund has AUM of $2.62 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 39.81%, 22.87% and 9.79% exposure, respectively (as of August 21, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top three allocations of the fund, with 16.54%, 13.36% and 4.90% exposure, respectively (as of August 21, 2017). The fund has returned 36.25% year to date and 29.95% in the last one year (as of August 22, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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