While the trade war dampens the economic outlook, some services-related ETFs could stand out or at least hold up much better than other sectors that rely on producing goods to turn a profit.
Goldman Sachs analysts argued that services companies like Amazon (NasdaqGS: AMZN) will fare better than goods producers like Apple (NasdaqGS: AAPL) during a trade war, CNBC reports.
“Services ﬁrms are less exposed to trade policy and have better corporate fundamentals than goods companies and should outperform even if the trade tensions are ultimately resolved, as our economists expect,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note.
Goldman singled out services stocks like Amazon, Google (NasdaqGS: GOOGL) and Microsoft (NasdaqGS: MSFT), which have less foreign input costs that are affected by tariffs and should outperform those that are exposed to trade barriers. Other names on the so-called services list include Netflix (NasdaqGS: NFLX), Comcast (NasdaqGS: CMCSA) and Wells Fargo (NasdaqGS: WFC)
“The trading pattern during the past year of tariff announcements and delays suggests services-providing stocks will outperform goods-producing stocks as long as the trade dispute continues,” Kostin added.
Moreover, the Goldman analysts argued that these services companies have more stable gross margins and stronger balance sheets, which could continue to support their growth trajectory regardless.
Looking ahead, the firm projected that the goods basket could see a negative earnings growth of 2% and no sales growth for the year.
“The faster growth rate supports the valuation premium of services, which trades at a 17.5x forward P/E multiple vs. 16.8x for goods,” Kostin said.
Investors who are interested in these services-side companies can look to sector-related ETFs. For example, the Communication Services Select Sector SPDR Fund (NYSEArca: XLC) includes 11.5% Alphabet Class C, 11.2% Alphabet Class A, 4.9% Comcast and 4.6% Netflix.
The Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY) holds a hefty 25.1% tilt toward Amazon.
Additionally, the Financial Select Sector SPDR Fund (NYSEArca: XLF) includes a 6.1% weight in Wells Fargo.
For more information on the market sectors, visit our sector ETFs category.