Watch These ETFs As Trade War Risks Rise

The materials sector is attracting a lot of investor attention lately. Industrial Metals have been rebounding on greater global optimism. This is primarily due to robust global growth cues and strong demand.

However, the relation between the United States and its trade partners is not so sweet right now, with fears of a potential trade war looming large. “We’ll be imposing tariffs on steel imports, and tariffs on aluminum imports. And you’re going to see a lot of good things happen,” Trump said. Trump’s America First agenda has sparked fears of a trade war, as he told steel and aluminum industry executives in a meeting about his intention to implement a 25% tariff on steel imports and a 10% tariff on aluminum imports.

Trump's tariff plan "is bad policy at a bad time and will only add to the risk of a trade war," per a New York Times article citing Shane Oliver, head of investment strategy at AMP Capital.

Into the Headlines

Trump said the tariffs will be introduced as early as next week. However, it is not yet clear if any specific product or country will be excluded from the arrangement. American stocks for companies that use the metals took a beating as a result of this announcement.

The U.S. measures “overturn the international trade order,” per a Bloomberg article citing Wen Xianjun, vice chairman of the China Nonferrous Metals Industry Association. “Other countries, including China, will take relevant retaliatory measures,” Wen added.

Japan voiced its concerns too. “Steel and aluminum imports from Japan, which is an ally, do not affect U.S. national security at all,” Japan’s Trade Minister Hiroshige Seko told reporters in Tokyo. “I would like to convey that to the U.S. when I have an opportunity,” Seko added.

American companies have for long criticized Chinese practices, as they complain that Chinese companies dump their products at below-market prices, thanks to the state subsidy they receive. However, America can expect retaliatory measures from China, as the emerging market nation is the largest producer of steel and aluminum. Amongst the biggest concerns, China is evaluating trade of soybeans and other farm products with the United States, which might weigh on American famers and ultimately on Trump’s support among rural Americans and Republican strongholds.

Adding to the agony, if the tariffs lead to an increase in raw material cost for manufacturers who use these metals, they might have to pass on a certain percentage of the rise to consumers. This in turn will add on to inflationary pressures, at a time when Wall Street is already worrying about the impact that rising inflation will have on the markets.

The S&P 500 entered correction territory, as it declined more than 10% from the record high set in January. Strong wage growth and jobs data introduced fears of inflation making a comeback and led investors to bet on aggressive rate hikes. Therefore, at an already shaky time for Wall Street, Trump’s tariffs do no good to alleviate investor concerns about the markets (read: 5 ETFs to Bet on Post Fed Minutes).

Let us now discuss ETFs that are expected to be impacted because of this announcement.

Materials Select Sector SPDR ETF XLB

This fund seeks to provide exposure to materials’ stocks and tracks the Materials Select Sector Index. It has AUM of $5.1 billion and charges a moderate fee of 13 basis points a year. Tariffs will be a positive for domestic steel makers and aluminum producers. “You’re going to have protection for the first time in a long time,” Trump told metals industry executives at White House (read: Steel ETF Soaring: Will the Trend Continue?).

The fund’s top three holdings are DowDuPont Inc. (NYSE:DWDP) , Monsanto Co. (NYSE:MON) and Praxair Inc (NYSE:PX) with 22.7%, 8.2% and 6.4% allocation, respectively (as of Mar 1, 2018). The fund has returned 12.8% in a year. XLB has a Zacks ETF Rank #3 (Hold), with a Medium risk outlook.

Industrial Select Sector SPDR Fund XLI

This fund focuses on providing exposure to the U.S. industrial sector. Increasing raw material costs might be a negative for companies in this sector.

It has AUM of $12.9 billion and charges a fee of 13 basis points a year. It has an 8.3% allocation to Boeing Co (NYSE:BA) , 6.0% to 3M Co (NYSE:MMM) and 5.0% to Honeywell (NYSE:HON) (as of Mar 1, 2018). The fund has returned 14.4% in a year. XLI has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

iShares MSCI Canada ETF (AX:EWC)

This is one of the most popular funds offering exposure to Canada. It is a perfect bet for those who are bullish on the overall performance of Canadian large-cap firms. Canada is the largest steel importer to the United States, accounting for 17% of overall U.S. steel imports in 2016. Moreover, Canada accounted for 43% of aluminum imports to the United States in 2016 (read: How to Trade Canada ETFs on Populist Budget?).

The fund manages AUM of $2.9 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.7%, 19.8% and 10.5% allocation, respectively (as of Feb 28, 2018). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.5%, 7.9% and 5.5% allocation, respectively (as of Feb 28, 2018). It has returned 4.9% in a year. EWC has a Zacks ETF Rank #3, with a Medium risk outlook.

Moreover, multiple other ETFs including iShares China Large-Cap ETF (TE:FXI) , iShares MSCI Brazil ETF EWZ and iShares MSCI EMU ETF EMU will bear the brunt of Trump’s agenda.

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