5 Sector ETFs Walk a Tightrope Amid Trade Tensions

Tensions between the United States and China escalated after the United States implemented a 10% tariff on Chinese imports on Feb. 4. In response, China retaliated with tariffs on U.S. products, including a 15% levy on coal and liquefied natural gas (LNG) and a 10% tariff on crude oil, agricultural machinery and automobiles effective Feb. 10.

Meanwhile, UBS believes that the U.S. effective tariff rate on China will eventually rise to 30% from the current 11%. Markets experienced volatile swings latey as Trump announced 25% tariffs too on goods from Canada and Mexico. However, Trump later announced a one-month pause on tariffs for Mexico and Canada.

In a client note, Bernstein analyst Stacy Rasgon said the United States imports few semiconductors from Canada, Mexico and China. But chips are used in finished electronics such as smartphones from China, computer gear from China and Mexico, and automobiles from Canada and Mexico, as quoted on investors.com.

Against this backdrop, we highlight a few sectors and their related stocks and exchange-traded funds (ETFs) that could be under the spotlight amid the escalating trade tensions.

Technology

Bloomberg News reported that regulators in China were considering introducing a formal investigation into Apple’s AAPL App Store fees and policies. Additionally, China initiated an antitrust investigation into Alphabet (GOOGL).

China is a key production engine for tech gear, including for American companies like Apple that have their products assembled in the country. In 2023, China made up for 78% of U.S. smartphone imports and 79% of laptop and tablet imports, the Consumer Technology Association trade group reported, as quoted on apnews.com. So, tech ETFs like Technology Select Sector SPDR ETF XLK and Communication Services Select Sector SPDR ETF XLC may face troubles.

Consumer

As tariff tensions are heating up, consumer stocks could be under pressure.  A sweeping new U.S. tariff on products made in China is expected to raise the prices American consumers pay for a wide array of products, from the ultra-cheap apparel sold on online shopping platforms to toys and electronic devices such as computers and cellphones.

Chinese exports of low-value packages jumped to $66 billion in 2023, up from $5.3 billion in 2018, according to report released last week by the Congressional Research Service, quoted on apnews.com. In the United States, Temu and Shein accounted for about 17% of the discount market for fast fashion, toys and other consumer goods.

The new tariffs will also hit third-party sellers on Amazon that import products from China, according to Squali, as quoted on apnews.com. There are high chances, retailers will try to pass on some burden of higher costs to consumers, thereby raising prices.

This is likely to bump up inflation levels in the U.S. economy. Higher inflation in turn will give a boost to bond yields. This, in turn, might push up consumers’ borrowing costs and hurt ETFs like iShares U.S. Consumer Services ETF IYC and SPDR S&P Retail ETF XRT.

Rare Earth Elements

China’s Commerce Ministry and Customs Administration revealed that the country is imposing export controls on rare earth elements like tungsten, tellurium, molybdenum and indium, which are crucial for the clean energy transition, with China controlling much of the global supply.

VanEck Rare Earth/Strategic Metals ETF REMX puts 26.87% of weight in China and 26.74% weight in the United States. The latest trade war puts focus on the REMX ETF.

Auto

U.S. auto companies earn about sizable revenues from China. The ongoing clash increased chances that tariffs could also be placed on auto imports. This, if put into effect, will weigh on First Trust NASDAQ Global Auto Index Fund CARZ.

Moreover, the United States and Mexico share trade ties in the automotive industry. Hence, sectors with the largest Mexico exposure, autos and auto parts, were particularly vulnerable. However, as mentioned earlier, President Trump paused tariffs on Mexico for a month.

He struck a deal with Mexican President Claudia Sheinbaum to deploy 10,000 National Guard troops at the northern border and curb drug trafficking, while the U.S. pledged to limit weapon smuggling.

Beverage

Beverages and spirits such as tequila, mezcal and beer accounted for a significant portion of U.S. imports, totaling almost $12 billion in trade. Corona beer maker Constellation Brands STZ could be at risks. The STZ stock has about 3.67% exposure to Invesco Food & Beverage ETF PBJ.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research