Retail ETFs Could Be Most Vulnerable in Latest Round of Tariffs

In light of President Donald Trump’s intentions to impose additional tariffs on Chinese goods, the latest round of trade barriers will take effect on a number of consumer products, potentially dealing a blow to consumer sector-related exchange traded funds.

Trump escalated the ongoing trade war between the U.S. and China after announcing an additional 10% tariff on $300 billion wroth of Chinese imports effective September 1. Analysts fear that the new round of tariffs will apply to a broad array of goods that retailers sell or raising the company costs, CNBC reports.

“The list of products these tariffs will hit are almost entirely consumer oriented,” the Retail Industry Leaders Association in a statement. “This new 10% tariff on Chinese imports is a direct hit on consumer products and family budgets, plain and simple.”

“If these tariffs happen, American consumers will bear the brunt of these tactics via higher prices on everyday items like clothing, toys, home goods, and electronics,” the statement added.

Retail ETFs have already taken a blow from the announcements. The SPDR S&P Retail (XRT) declined 0.4% Friday after retreat 3.2% the day prior, and VanEck Vectors Retail (RTH) was down 0.6% Friday after falling 1.3% the day before.

“Particularly this last round is much more consumer than industrial focused,” Oppenheimer analyst Brian Nagel told CNBC. “Best Buy is very much the last man standing within the consumer electronics category but … it’s a much more price-sensitive discretionary purchase for the consumer.”

Additionally, Credit Suisse analyst Michael Binetti pointed out that most of the footwear and apparel space still has 10% to 15% of U.S. goods coming from China.

“Companies can’t price quickly, adding risk to C2H estimates before tickets can be reset in 2020,” Binetti said.

Investors who believe the tariffs will continue to weigh on the retail segment can consider bearish or short ETF strategies to hedge against the weakness, such as something like the ProShares Decline of the Retail Store ETF (NYSEArca: EMTY). The Decline of the Retail Store ETF provides daily short exposure or -1x to the Solactive-ProShares Bricks and Mortar Retail Store Index, which is comprised of traditional retailers and equally weights components. The fund holds companies that include department stores, supermarkets and sellers of apparel, consumer electronics and home improvement items, such as retailers like Barnes & Noble, The Gap, Macy’s, Kroger and Best Buy, among others.

The Direxion Daily Consumer Discretionary Bear 3X ETF (NYSEArca: PASS) is another option. WANT seeks the daily -3x or inverse 300% performance of the more widely observed Consumer Discretionary Select Sector Index.

For more information on the consumer sector, visit our consumer discretionary category.