Investors seem to be increasingly worried about a trade war with China, as President Donald Trump has increased the ante on the Asian economic powerhouse as part of long-running trade tensions between the two nations. Trump has raised tariffs on $200 billion in Chinese goods from 10% to 25%. He also said that the U.S. could enact new tariffs of 25% on $325 billion more Chinese goods.
Here we discuss a number of sectors that could be affected by the changes in tariff policy and those investments that are more geared for investors looking to avoid the ongoing trade negotiations and maybe even profit from them.
The new 25% tariffs apply to a range of consumer goods, including home appliances, carpet, shampoo and even seafood. It also applies to chemicals, steel and aluminum. So investors may want to stay away from sectors that use those products as inputs.
After the first round of tariffs were imposed by the U.S. last year, China initially retaliated with tariffs of 5% to 10% on $60 billion of U.S. products, hurting small businesses and farmers. After the U.S. raised its levies this month, China announced it’s escalating its own tariffs to 10%, 20% and 25%, starting June 1.
An analyst from investment bank J.P. Morgan recently warned investors to watch out for the American semiconductor industry, which is heavily exposed to China.
While tariffs may hit these sectors directly, the tariffs also have follow-on effects. For example, the small business owner who gets hurt may not be able to dine out as frequently or may have to delay a new car purchase.
Nevertheless, investors looking to dodge the worst of the tariff dispute should look to sectors that derive all or almost all of their sales from domestic sources.
Here are five investments for those looking to minimize the dispute’s impact on their portfolio.
1. High-yield savings account or CD
It doesn’t get more insulated from trade concerns than a savings account or certificate of deposit. You will receive a specified level of return for keeping your money in the bank, and you won’t have to worry about the stock market at all. These products are backed by the FDIC, so you are guaranteed to get your principal back, up to $250,000 per bank account, per person.
The telecom sector includes traditional telecommunication companies such as AT&T and Verizon as well as less-obvious companies such as cable juggernauts Comcast and Charter Communications. These companies benefit from a highly domestic focus and have relatively minimal or no exposure to China directly.
One easy way to buy the telecom sector is through an exchange-traded fund (ETF) that contains shares of the largest players in the industry.
3. Health care
The key benefit of investing in health care providers is that the demand for their product is consistent and growing, while virtually all the payments come from insurers or federal and state governments. So revenue should remain stable even if other industries get hit by the effects of tariffs. Look for an ETF that gives you exposure to health care providers and insurers. The ETF’s assets will be most concentrated in the largest companies in the industry.
Real estate investment trusts, or REITs, are companies that own and manage real estate. They pay out substantial dividends in exchange for not having to pay tax at the corporate level. REITs can be a great investment for those looking to avoid the tariff specter, because their rental contracts are typically locked in for years at a time. The nature of these contracts means that shorter-term issues like tariffs will have little effect on the fundamental business. You can buy individual REITs on the stock market just as you would traditional companies, or you can also buy an ETF that holds many REITs and therefore avoid company-specific risks.
5. The VIX Index
If you are looking to make money on the market’s upheaval — which could happen if a trade war begins in earnest — one possible way to do that is through the VIX Index. The VIX measures the market’s expectation of future volatility. Generally it rises when the market falls and investors become more anxious about the future direction of the market. Therefore, it’s often called the market’s fear gauge. Because of how it’s structured, the VIX is not the best asset to hold indefinitely, but it’s attractive for those speculating when the market will be turbulent during difficult times.
If you think the trade situation is going to get worse, these investments could be a more protected outlet for new money. But even relatively insulated investments can decline in value if the overall market turns negative. So there’s no perfect place to hide. That’s why it’s often best to take a long-term attitude to the market and not get too focused on short-term events. And that means staying invested in a broadly diversified fund of top U.S. stocks, such as an S&P 500 index fund, even as trade worries seem to frustrate the market.
James Royal writes for Bankrate.com.