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Will Consumer ETFs Lose Momentum on Trump Tariffs?

President Donald Trump maybe going all-out to keep Americans at the top spot, but his strategy of protectionism actually looks like a curse for Americans. The President is striving to bring manufacturing jobs back to the United States and aims to keep the country at a beneficial position in world trade. That’s why he slapped import tariffs on a number of commodities against China, Canada, Mexico and the EU(read: Fed, Trade & Global Politics to Rule June: 6 ETF Picks).

Inside Escalating Trade Conflicts

President Trump’s $50 billion levy on Chinese imports has lately been retaliated by a Chinese levy on an equal worth of goods. Donald Trump excluded “goods commonly purchased by American consumers such as cellular telephones or televisions” in the initial round of tariffs ($50 billion) on Chinese goods, but a possible $200 billion (which the President plans to levy if China keeps retaliating) will probably include consumers’ favorite imports (read: Time to Buy Defensive ETFs?).

Retailers to Pass on Higher Prices to Consumers

Per Bloomberg, a broad range of items used by U.S. consumers – “from Under Armour leggings to Bath & Body Works shower gel and Samsonite luggage -- are sourced from Chinese or Hong Kong based companies and factories.”

Levy of import duties will lead those affected retailers to pass on the price hikes to consumers.  As a result, retail behemoths like Walmart Stores Inc. WMT, Macy’s Inc. M and more than 20 other retailers expressed concerns on the tariff issue.

An Uptick in Inflation

The Trump administration imposed a 25% tariff on steel imports and a 10% tariff on aluminum on some countries. These key metals are used in a number of necessary items used. An upward pressure on prices from tariffs would perk up inflation.

Fed to Hike Faster?

The tariff tantrum comes at a moment when the Fed is sending hawkish signals. The U.S. central bank has already enacted two rate hikes this year and may put two more into effect. But if tariff-induced inflation crosses the Fed’s 2% goal too soon, the central bank might take to faster rate hikes. This, in turn, would give a boost to bond yields. And if borrowing costs keep on rising, consumers may feel the pinch.

Stock & Bonds to Slump?

In a rising rate scenario, both stocks and bonds suffer. A dearth of cheap money flows acts as a roadblock to equity trading while investors’ bond holdings suffer from interest rate risks. Notably, “stock values affect the wealthy more than the middle class, but many ordinary Americans own stocks in retirement plans, and the direction of 401(k) plans impacts consumer confidence,” per an article published on Financial Times. So, a downbeat investing backdrop would cut back on Americans’ portfolio returns.

Are U.S. Jobs Under Pressure?

It is expected that the United States won’t be spared from retaliation. While U.S. tariffs would increase the price of domestic products, trade partners’ tit-for-tat tariffs are likely to cut down on sales. Just on China tariffs on U.S. soybeans “could cost Iowa farmers up to $624 million.” To restore profitability, American corporations may choose to lay off and hurt U.S. job markets and consumers.

ETFs in Focus

Against this backdrop, below we highlight a few consumer staples ETFs which have been on a rallying mode in the last one month. These include the likes of John Hancock Multifactor Consumer Staples ETF JHMS, First Trust Consumer Staples AlphaDEX Fund FXG and Fidelity MSCI Consumer Staples Index ETF FSTA, which returned in the range of 5% to 5.5%.

Consumer discretionary ETFs like VanEck Vectors Retail ETF (RTH), SPDR S&P Retail ETF (XRT) and Invesco Dynamic Retail ETF (PMR) returned in the range of 54% to 8.4% during the past month (as of Jun 25, 2018). But if Trump tariff takes an ugly shape, investors should keep a tab on these ETFs.

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VANECK-RETAIL (RTH): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
FT-CONSUMR STP (FXG): ETF Research Reports
PWRSH-DYN RETL (PMR): ETF Research Reports
FID-STAPLES (FSTA): ETF Research Reports
Walmart Inc. (WMT): Free Stock Analysis Report
Macy's, Inc. (M): Free Stock Analysis Report
JH-M-F CONS STP (JHMS): ETF Research Reports
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