You are here

Want to profit from a trade war? There's an investment fund for that too

New York

IN the always inventive world of exchange-traded funds (ETFs), 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 ETFs 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 index tumbled more than 4 per cent as US-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 per cent.

In early June, the Innovation Alpha Global ETF started operations. Run by MCAM International of Charlottesville in Virginia, 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,the German shoe company; Bayer, a German pharmaceutical company; 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 ETF appears quite fortuitous, it's been around as a trading strategy for quite a long time," he 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 non-financial 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."

The fund made its debut on June 5. By the end of the month, it was up 5.2 per cent compared to 6.9 per cent 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 ETF 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 ETF, gained nearly 33 per cent for the five years ended at the start of July, but it lagged the S&P 500, which gained nearly 55 per cent. Through June, the ETF was up 12 per cent, while the S&P 500 gained about 17.3 per cent.

For a value approach - geared to stocks that are cheaper than their peers - Mr Sotiroff pointed to two funds. These are the Schwab Fundamental International Large Company Index ETF, focusing on developed markets excluding the US, and the Schwab Fundamental Emerging Markets Large Company Index ETF. The large company fund was up 11 per cent through June; the emerging markets fund was up nearly 13 per cent.

"You're buying companies that are cheaper, but they're cheaper for a reason," he said. These stocks tend to be out of favour 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." NYTIMES