There are steps investors can take.
Trade war talk roiled the stock market in 2019 as President Donald Trump and China continued to one-up each other, sending yields down and prompting investors to flee for cover. “A trade war would be deleterious to the entire global economic backdrop,” says John Traynor, chief investment officer at People’s United Wealth Management in Bridgeport, Connecticut. “In the long run, there are very few winners in a trade war, just those who lose relatively less.” While stocks have generally had a good 2019, waves of volatility will likely continue as long as Trump-imposed tariffs are dominating the global economy. Investors can weather the trade war by considering these seven investments.
Treasury bonds offer security.
The Treasury’s inflation-protected securities can be a haven in a trade war for three reasons, says Scott Kubie, chief investment officer at Carson Group in Omaha. “Tariffs are inflationary because they raise the price of foreign goods and allow domestic producers to increase prices as well,” he says. TIPS offer built-in inflation protection. Furthermore, they benefit from a drop in interest rates which could occur if a trade war slows economic growth. Their Treasury-backed nature also offers protection against increased bankruptcy risk that a trade war can trigger.
Think small-cap for big results.
“Small-cap stocks represent companies who tend to derive a larger proportion of their revenues domestically than abroad and thus, are likely to be less impacted by a trade war,” says Joe Smith, senior market strategist at Omaha-based CLS Investments. Small-cap stocks have performed well in 2019, with the iShares Russell 2000 ETF (ticker: IWM) gaining 11%. But, small-cap stocks may not be completely bulletproof in a trade war. “Small-cap stocks are not immune to equity market volatility,” Smith says.
But don’t forgo large-caps completely.
Large-cap companies may experience more volatility during a trade war, but investors shouldn’t ignore them. “At its core, a trade war is meant to make products or components produced in other countries more expensive than their domestic counterparts,” says Josh Blechman, director of capital markets at Exponential ETFs. “Therefore, the companies that will be most affected by this phenomenon are large international companies that manufacture and sell across the globe.” Blechman says the Reserve Cap Weighted Large Cap ETF (RVRS) offers investors less concentrated exposure to S&P 500 constituents, favoring smaller, domestically focused large-cap companies “more likely to have their products benefit from tariffs placed on international competitors in their space.” The RVRS is up 14% so far in 2019.
Try tech innovators on for size.
FANG stocks – Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google (GOOG, GOOGL) – are always appealing, but be cautious if the Trump trade war escalates. Threatened tariffs on Apple products could cause the price of iPhones to increase 10% or more in September. However, there are smaller tech companies worth a look. Bill Studebaker, president and CIO of ROBO Global, recommends online supermarket Ocado Group. Ocado recently entered a tech-driven partnership with Kroger Co. (KR), which Studebaker says is expected to position Kroger as a true rival to Amazon.com (AMZN). That partnership contributed to a 250% increase in Ocado’s stock in early 2019. But don’t put all your eggs in one tech basket during a trade war, Studebaker says, as “true opportunity lies across the entire robotics and artificial intelligence supply chain.”
Get back to basics with commodities.
Commodities are a popular defensive play against the inflationary effects of a trade war. “Commodity prices have historically been highly correlated with inflation, typically acting as a type of leading indicator of inflation,” says Will Rhind, founder and CEO of GraniteShares. “This is because commodity prices may react more quickly to increased demand and decreased supply.” He says investors may want to consider something like the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), benchmarked to the Bloomberg commodity index. This index offers exposure to 20 commodities. COMB “should provide investors with direct exposure to inflation through rising commodity prices, allowing investors to potentially hedge their portfolios against inflation.” The ETF has an expense ratio of 0.25% or $25 annually per $10,000 invested.
Invest closer to home.
Domestic stocks can look more attractive as a trade war notches up and certain sectors face less exposure to trade issues. Focusing on health care could be a good move and Traynor recommends UnitedHealth Group (UNH), the dominant health insurer in the U.S. If you’re interested in casting the net a little wider, consider funds that invest companies that primarily do business in the U.S., such as the iShares Russell 1000 Pure U.S. Revenue ETF (AMCA). This relatively new ETF includes health care, financials and consumer discretionary sectors and carries a low expense ratio of 0.15%.
Reconsider real estate.
Real estate can take a hit if a trade war causes inflation to spike, but certain sectors may be able to cope better than others. Jordan Farris, head of ETF product and development at Nuveen, says real estate investment trusts, such as the Nushares Short-Term REIT ETF (NURE), can help overcome trade war fears. “NURE is a passively managed ETF tracking an index of hotel REITs, apartment REITs, manufactured home REITs and self-storage REITs. These four segments of the publicly listed REIT market have historically outperformed during periods of rising interest rates and are less impacted by trade than are other areas of the REIT market.” NURE is up 17.7% so far in 2019.