Investors can prepare for a trade war.
There has been a lot of talk about a trade war in 2018, with tariffs announced on materials like steel and aluminum. This has terrified many investors — for good reason. Protectionist policies never end well for the economy and are blamed for making the Great Depression a deep and long-lasting event. But if the U.S. is indeed going down this road of tariffs and trade wars, then investors need to prepare. One of the best ways to do that is to avoid interconnected multinationals, and to play smaller corporations that are insulated from global trade. Here are seven exchange-traded funds that will help you do exactly that.
iShares Russell 2000 ETF (ticker: IWM)
The go-to small-cap ETF is the IWM, with a whopping $40 billion under management. This fund is pegged to an index that has purposely excluded the top 1,000 U.S. corporations by market value and then selected the next 2,000 picks after that. Some of the stocks you might recognize, like recently-IPO’d food ordering app GrubHub (GRUB), but a host of others are names you’ve never heard of. The largest is still under $10 billion in market capitalization. There are sure to be select stocks that may be impacted by a trade war in a list this large. But the general flavor of small and domestic holdings should severely limit overall exposure.
SPDR S&P 600 Small Cap Growth ETF (SLYG)
Instead of simply chasing a wide group of smaller companies, the SLYG focuses on 600 stocks with more of a growth flavor to them. According to the fund’s documentation, it focuses on price-earnings and price-sales ratios, among other metrics. The fund also is biased toward slightly smaller names than a Russell 2000 index fund, with market capitalizations of around $400 million to $2 billion. Components include hospice care company Chemed Corp. (CHE) and pawn shop operator FirstCash (FCFS). Those are prime examples of companies that have no worries from global trade fluctuations.
Vanguard Small-Cap Value ETF (VBR)
Growth-oriented names often come with more risk. If you’re really worried about disruptions to the broader global economy, you may want to seek stable companies trading for a fair price. That’s what VBR offers. The fund contains just under 900 stocks, with a median market capitalization of about $3.8 billion. It finds value in this universe of stocks, however, thanks to a focus on metrics like return on assets and overall book value. The only drawback is bias toward financials, with about 30 percent of assets in the sector. However, local banks are naturally insulated from big world trade trends, so that may ultimately be a net positive for some investors.
PowerShares Zacks Micro Cap Portfolio (PZI)
If you really want to go small, then this unique PowerShares offering gives access to some of the tiniest publicly traded stocks out there. The largest stock in the portfolio of 400 holdings is about $1 billion and many of them trade for only a few dollars a share. Keep in mind that the smaller the company is, often the greater the risk. This fund has lagged the broader stock market significantly with just 3 percent returns in the last year (versus about 12 percent gains for the Standard & Poor’s 500 large-cap index). However, looking forward, the time may be right for the companies in the PZI.
WisdomTree US SmallCap Dividend ETF (DES)
If you want to go small but still want a bit of stability, the DES offers a focus on dividend payers that may not have the scale of the big boys but still offer consistent and substantial payouts. Top holdings include CVR Energy (CVI) and mall retailer American Eagle Outfitters (AEO), with the fund spread pretty evenly across sectors. The top industry of focus is consumer discretionary at about 21 percent of holdings, followed by industrials and real estate. An added plus: With a 30-day yield of about 3.6 percent, DES offers a better payout than some large-cap dividend funds.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
If you’re looking for a safe-haven asset in times of trouble, gold tends to be a good bet. And a twist on conventional gold investing, without the hassle of buying and storing coins and bars, is to invest in companies that extract gold from mines. A fund that only holds the smaller players is GDXJ. Among the top holdings are Yamana Gold (AUY) and Kirkland Lake Gold (KL). Interestingly, this fund has more than half of its assets in Canada. However, investors looking for insulation from a trade war may be well-served by the one-two punch of an uncorrelated asset and exposure outside U.S stocks.
PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD)
One of the reasons the American economy remains resilient is the tremendous spending power of regular citizens. That engine of economic growth is somewhat insulated from trade wars. Think about neighborhood restaurants or the painter who spruces up your living room. There may be a few imported materials these businesses need, but their focus is largely domestic. That makes the PSCD a great investment right now. Top holdings clearly reflect domestic spending, with stocks like footwear giant Steve Madden (SHOO) and casino operator Penn National Gaming (PENN). About 26 percent of the fund is in retail stocks, but other industries like hospitality and media are represented.
More from U.S. News
7 of the Best Stocks to Buy for 2018
The Top 10 Investment Portfolio for Millennials
Artificial Intelligence Stocks: The 10 Best AI Companies
7 Small-Cap ETFs to Help You Win a Trade War originally appeared on usnews.com
