Trump's Tariffs Shake Markets: ETFs to Watch

The global stock market is threatened by renewed escalation in trade war. This is especially true as President Donald Trump levied 25% tariffs on Canada and Mexico and 10% on China this weekend, citing that the measures were necessary to combat illegal immigration and drug trade.

Canada and Mexico immediately vowed retaliatory measures, while China said it would challenge Trump's levies at the World Trade Organization (read: China ETFs in Tug-of War Between Tariff Threats & Policy Boost).

The move will drive U.S. inflation faster than expected and hurt consumers, driving up the prices of goods and curtailing spending. It will also affect the global economy and corporate profits, particularly that of big U.S. exporters. All these will continue to weigh on the stock market and could disrupt global supply chains.

A model by EY chief economist Greg Daco estimates that Trump’s tariff plan could slash U.S. economic growth by 1.5 percentage points this year, and push Canada and Mexico into recession and trigger domestic stagflation. An analyst at Barclays previously projected that the tariffs, along with expected retaliatory measures, could reduce S&P 500 earnings by 2.8%. Goldman expects the latest tariffs to reduce S&P 500 earnings forecasts by about 2% to 3%, and warned the index fair value could slump about 5% over the near term.

Global Stocks Bleed

The tariff tantrums sent the stock market across the globe into a tailspin. U.S. stock sold off sharply, with Dow Jones Industrial Average futures 1.4% in early trading today. The S&P 500 dropped 1.9%, while the Nasdaq Composite Index dived 1.9%. 

Major Asian indexes saw heavy losses in response to Trump’s tariffs. The MSCI Asia Pacific Index plunged more than 2% in today’s trading session, while Japan’s Nikkei 225 index and South Korea’s Kospi each tumbled more than 2.5%. Hong Kong's Hang Seng Index was down 0.7%, and Australia's ASX 200 fell 1.9%. The Taiwan Stock Exchange weighted index declined more than 3% and pan-European Stoxx 600 was down 1.3% at the time of writing. 

The global sell-off will result in huge demand for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. These products either create a short position or a leveraged short position in the underlying index through swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend. 

ProShares Short S&P500 ETF SH and ProShares UltraPro Short S&P500 SPXU offer inverse and three-times inverse exposure, respectively, to the daily performance of the S&P 500 Index. ProShares Short QQQ and ProShares UltraPro Short QQQ SQQQ offer inverse and three-times inverse exposure, respectively, to the daily performance of the Nasdaq-100 Index.

Dollar, Yields and Oil Rise

The U.S. dollar jumped 1% to hit the highest level in more than two years while other currencies lost. The Canadian dollar sank to its weakest since 2003 and the euro slumped, heading closer to parity with the greenback. The Mexican peso also plunged in today's trading session. Invesco DB US Dollar Index Bullish Fund UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. It has a Zacks ETF Rank #3 (Hold).

Trump’s move to unleash tariffs on top trading partners may push the economy into stagflation, thereby pushing yields higher. Notably, the Treasury yield curve flattened the most in 11 weeks, with 2-year yields rising to 4.25% and 10-year yields falling to 4.53%. The gap between the two shrank the most since Nov. 14 on an intraday basis. The drop in 10-year yields signals investor concern over U.S. growth prospects and will likely provide a boost to ETFs like iShares 20+ Year Treasury Bond ETF TLT. It provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Years Bond Index. Currently, it has a Zacks ETF Rank #4 (Sell).

Meanwhile, crude oil futures also jumped around 2%. United States Oil Fund USO seeks an average daily percentage change in USO’s net asset value for any period of 30 successive valuation days within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period (read: Oil ETF Hits New 52-Week High).

Gold Range-Bound

Gold is range-bound as the strengthening dollar more than offset the safe-haven demand. As the world braces for a trade war following Trump’s tariff tantrums, the appeal for yellow metal has increased. Gold is often used to preserve wealth during financial and political uncertainty and usually does well when other asset classes struggle. Additionally, the inflationary pressure caused by new tariffs would benefit the precious metal's status as a hedge against rising prices.

However, a strong dollar makes the yellow metal more expensive for buyers using other currencies, thereby providing a cap to the upside. 

Gold ETFs, directly linked to the spot or future prices, will be in focus. Some of the popular ones are SPDR Gold Trust ETF GLD, iShares Gold Trust IAU, and SPDR Gold MiniShares Trust GLDM. These funds have a Zacks ETF Rank #3.

Where to Park Money?

Investors should focus on areas that offer low volatility or consistent income investing. Low volatility ETFs like iShares MSCI USA Min Vol Factor ETF USMV have the potential to outpace the broader market in the event of turmoil, providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. USMV has a Zacks ETF Rank #2 (Buy) (read: Low Volatility ETFs to Bet on Amid Market Turmoil).

Dividend-paying securities are major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields regularly. Vanguard Dividend Appreciation ETF VIG, having a Zacks ETF Rank #1 (Strong Buy), seems a solid pick.

Small Caps: A Potential Winner of Tariff Tantrums

Investors could seek shelter in a basket of small-cap stocks that have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to trade war or any other political issues and could better insulate investors against global headwinds. The ultra-popular iShares Russell 2000 ETF IWM, having a Zacks ETF Rank #2, could be the best pick.

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