Want to Profit From a Trade War? There’s an Investment Fund for That
Cranes for moving shipping containers are ready for action at a container terminal in Staten Island.CreditJustin Lane/EPA, via Shutterstock
By Brian J. O’Connor
In the always inventive world of exchange-traded funds, you can find funds focused on European carbon credits, social media, and even one that aims to profit from the obesity of Americans.
“There’s a lot of wacky stuff out there — I can’t keep track of them all,” said Daniel Sotiroff, an analyst with Morningstar Research Services. “People are drawn to the new, bright shiny objects.”
So, of course, there are E.T.F.s aimed at investing in America’s trade and tariff tiffs with China, India, Europe and whatever other nation or region the Trump administration may be confronting.
For the last several months, trade fights have played out in the market. During May, the broad S&P 500-stock index tumbled more than 4 percent as United States-China trade tensions rose, after the index reached a new high during April. By the end of June, the index jumped on a reported thaw in bilateral trade relations, with stocks in some sectors — such as technology and gambling — having one-day pops of as much as 6 percent.
In early June, the Innovation Alpha Global E.T.F. started operations. Run by MCAM International of Charlottesville, Va., the fund is based on an index that tracks 120 companies, focusing on the strength of their intellectual property and ties to “government patronage,” which the managers expect to insulate those shares from international trade battles.
The fund’s top holdings include Adidas, a German shoe company; Bayer, a German pharmaceutical compay; Microsoft; and Kering, a French luxury goods maker.
This approach is not new, according to David Martin, founder and chief executive of MCAM. “While the timing of this particular E.T.F. appears quite fortuitous, it’s been around as a trading strategy for quite a long time,” Mr. Martin said. The underlying index has helped MCAM’s investing since 2001 and has been used in its hedge funds since 2005, he said.
Mr. Martin said MCAM looked at nonfinancial disclosures — such as trade complaints and agreements — to ferret out companies likely to receive support from their national governments in a trade fight.
“Part of the reason our strategy works is that we look at international trade as a global phenomenon, not a national one,” he said.
The fund made its debut on June 5. By the end of the month, it was up 5.2 percent compared to 6.9 percent for the S&P 500. Mr. Martin also provided back test data — which may not reflect future returns — showing that the strategy has done well in the past.
Another approach is to invest in an E.T.F. that tracks emerging markets generally but excludes companies listed or domiciled in China and Hong Kong. Such a fund, the Columbia EM Core ex-China E.T.F., gained nearly 33 percent for the five years ending at the start of July, but it lagged the S&P 500 index, which gained nearly 55 percent. Through June, the E.T.F. was up 12 percent, while the S&P 500 gained about 17.3 percent.
Yet another China trade strategy is to seek bargains in beaten-down stocks and play for the potential bounce when the trade war wanes, said Dave Nadig, managing director of ETF.com. “You want to focus on portfolios that include Chinese A shares, the local shares sold on mainland China, which are the most depressed,” he said.
Mr. Nadig cited the Xtrackers Harvest CSI 300 China A-SharesE.T.F., based on an index of the 300 largest and most liquid stocks in the China A-Share market, which trade on the Shanghai and Shenzhen stock exchanges. The index includes stocks that focus on Chinese consumers. Through June, the E.T.F. was up more than 30 percent.
Mr. Sotiroff, the Morningstar analyst, suggested a longer-term strategy, based on E.T.F.s that provide broadly diversified exposure in emerging and developing markets.
“These are very well diversified, not single-industry bets, that you could hold for 10 or 15 years and get a good outcome,” he said. “Plus, both funds are very cheap compared with other options in those categories.”
Through June, the developed markets fund was up more than 10 percent and the emerging markets fund was up almost 6 percent, compared with the S&P 500’s gain of 17.3 percent, illustrating the trade-off among risk, return and stability.
“You’re buying companies that are cheaper, but they’re cheaper for a reason,” he said. These stocks tend to be out of favor with investors, and there’s no guarantee that will change. “They’re cheap but they’re risky.”
Short-term tactics aimed at exploiting trade tensions are risky in themselves. Longer-term investing may make more sense for most people.
“You don’t know what’s going to happen in these negotiations with tariffs and other countries,” Mr. Sotiroff warned. “Two years from now, we could have an administration in office with a completely different approach. Part of the game with investing is that you have to ride these things out once in a while. The main principle is staying invested and letting your returns compound.”
A version of this article appears in print on , Section BU, Page 17 of the New York edition with the headline: Trade Tensions Offer Opportunities for Bold Investors. Order Reprints | Today’s Paper | Subscribe