Speculation that the Trump Administration’s recently announced tariffs on imported aluminum and steel will spark a trade war is prompting some investors to depart exchange traded funds viewed as vulnerable to trade wars. Some other sector ETFs are adding assets as a result.
The tariffs fueled concerns of higher selling prices or diminished profits for U.S. corporations in those industries. Furthermore, some feared other countries could retaliate with their own tariffs on goods the industrial sector utilizes. Industrial ETFs, including the Industrial Select Sector SPDR (NYSEArca: XLI), the largest exchange traded fund tracking industrial stocks, have suffered outflows in the wake of the tariff announcement.
Conversely, investors are showing some enthusiasm for materials ETFs, including the Vanguard Materials ETF (NYSEArca: VAW).
“Last week, investors poured a record $334 million into the Vanguard Materials ETF, ticker VAW. At the same time, they pulled $96 million from the Vanguard Industrials ETF, ticker VIS, the largest amount in more than a year. It’s a classic rotation — grab exposure to the expected winners and dump the potential losers,” reports Bloomberg.
Due to their close ties with the commodities market, materials stocks and ETFs are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth. Rivals to VAW include the Materials Select Sector SPDR (NYSEArca: XLB) and the Fidelity MSCI Materials Index ETF (NYSEArca: FMAT).
The White House “ultimately imposed a levy of 25 percent on steel and 10 percent on aluminum, but it exempted Canada and Mexico and gave other countries some wiggle room. The move is expected to increase prices, particularly on the commodities in question, which would benefit materials companies and hurt industrials,” according to Bloomberg.
The Guggenheim S&P Equal Weight Materials ETF (NYSEArca: RTM), which equally weights components and includes a larger tilt toward smaller U.S. companies, holds larger tilts toward construction materials sub-sector.
For more information on the materials sector, visit our materials category.