As the trade war rhetoric intensifies, some investors are concerned that the tensions could push the U.S. economy into a recession. However, investors can turn to a number of ETF strategies that can help a portfolio hedge against the risks.
“Our calculations suggest that a major trade war would lead to a significant reduction in growth,” Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, said in a note, according to CNBC. “A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession. We continue to believe that the probability of a full blown trade war is low but the risks are rising and it remains a key uncertainty to our outlook.”
Concerns over a full blown trade war comes as President Donald Trump threatens more stringent tariffs aimed at both China and the European Union. On the same day the Bank of Merrill Lynch revealed its concerns, Trump warned that the U.S. could hit European auto imports with a 20% tariff unless the E.U. curbs duties on American cars.
Will U.S. Growth Weaken?
Observers are concerned that the duties on imports could cause a reciprocal actions that would spiral out of control and potentially fuel inflation and weaken U.S. growth. The retaliatory actions between global economies in the trade spate would also dampen consumer and business confidence.
“The good news is that we are still many steps away from a full blown global trade war,” Meyer said. “The bad news is that the tail risks are rising and our work and the literature suggest a major global trade confrontation would likely push the US and the rest of the world to the brink of a recession.”
Consequently, investors who are concerned about the potential risks ahead may consider CBOE Volatility Index or VIX-related exchange traded products that track VIX futures, which allow traders to profit during rising volatility or hedge against short-term turns.
8 ETFs to Hedge Fallout
For instance, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) track short-term VIX futures. Potential traders should be aware that these VIX exchange traded products track the futures market and not the spot price of the VIX.
More aggressive traders have turned to the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY), which provides the 2x or 200% daily performance of the S&P 500 VIX Short-Term Futures Index.
Additionally, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500 as well. The ProShares Short S&P500 (NYSEArca: SH) or the Direxion Daily S&P 500 Bear 1x Shares ETF (NYSEArca: SPDN) take a simple inverse or -100% daily performance of the S&P 500 index.
Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500.
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