The Nasdaq Composite shed 1.43% at Monday’s closing bell, thanks to investors fretting over the additional tariffs U.S. President Donald Trump is set to impose on $200 billion of Chinese goods. Heavy hitters in tech saw declines today like FANG stock mainstays Apple, Netflix and Amazon.
Apple lost 2.7% on potential issues looming as the trade war escalation between the U.S. and China could negatively impact computer parts. While the trade wars continue to move and shake the U.S. capital markets, it hasn’t deterred investors from deploying capital into exchange-traded funds (ETFs)–$167.9 billion worth of inflows.
“We’re having more money coming in to U.S. equity ETFs, U.S. fixed-income ETFs than international ETFs that we saw at the beginning of the year,” said ETF Trends publisher Tom Lydon on CNBC’s Closing Bell on Monday.
Perhaps the move to U.S. equity ETFs presages that more pain is headed towards emerging markets as trade war uncertainties continue to be a thorn in their side or it’s simply a matter of investors following the money and with the major U.S. indexes like the S&P 500 hitting record highs, the U.S. stock market has been the go-to strategy. However, there is also considerable value belying emerging markets when taking a closer look at fundamentals.
“We’ve got this big decline, but the PE (price-to-earnings ratio) is around 10 in China, 11 in emerging markets,” said Lydon. “There’s some emerging market ETFs that are really, really cheap and also, you can get them for an expense ratio of 14 basis points.”
While the two economic superpowers continue to lock horns on trade, a positive outcome on trades talks could give a much-needed boost to China-focused ETFs and emerging market ETFs. As Lydon suggests, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.
“If you see that this might just be a tactical move on Trump’s part and their plan is to eventually work something out, what a great buying opportunity and we’ve already seen a huge amount of money come in through ETFs this year,” added Lydon.
Emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 7.67% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 7.3% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 7.78% YTD, could turn their fortunes around by year’s end with a tailwind of positive trade news. While these options present broad-market exposure to opportunities abroad, there are country-specific ETFs investors can capitalize on as well, but Lydon says general exposure to international markets, developed or emerging, will suffice.
“For the average investor, they do have a home country bias, especially as everything has been great in the U.S.,” said Lyon. “Make sure you have at least some allocation overseas–overseas developed, overseas emerging markets.”
Related: Emerging Markets Enter First Big Rate Rise Cycle Since 2011
Fixed-Income ETF Movement from ‘AGG’
Bonds have typically complemented an investor’s portfolio replete with U.S. equities and that trend appears to continue in the ETF space. While broad market exposure to fixed income can be realized with the iShares Barclays Aggregate Bond Fund (NYSEARCA: AGG), investors are currently in a risk-on mindset, which doesn’t parallel the low yields in safe-haven government debt like benchmark Treasuries.
The gains seen in the stock market have worked up a similar thirst for high-yield investments in the fixed-income space, which could be realized in corporate bond ETFs and high-yield bond ETFs. In addition, funds that employ an active strategy are also coming in to favor, giving investors exposure to ETFs that can flex with the economic landscape as opposed to staying in a fixed strategy as the market unfolds.
“We’ve seen a lot of movement away from the Barclays AGG because it’s got so much Treasury,” said Lydon. “So a lot of ETF money has moved into active ETF strategies to move away from Treasuries, because they’re top heavy in that area and more into areas like corporates, like high-yields, like bank stocks–those types of things.”
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