Stocks have had a volatile start to the week due to investors not knowing the full effect the trade agreement will have on the market and futures. The United States and China signed the first-phase of the long awaited trade deal on Wednesday. The S&P 500 (NYSE: SPY) rose on Wednesday but lost much of its gains at close, while the Nasdaq (NASDAQ: QQQ) ended lower, but still held gains from morning trading. As part of the "phase one" trade deal, China has agreed to purchase an additional $200 billion in U.S. goods over the next two years. However, the White House has said that it will leave tariffs on another $250 billion in Chinese products at least until after the November 2020 election. President Donald Trump stated: "We're leaving tariffs on, but I will agree to take those tariffs off as we are able to do 'phase two.' In other words, [the two nations are] negotiating with the tariffs."
But the two nations have agreed on a trading future for the next two years. The composition of the $200 billion additional goods China will purchase include: Manufactured goods: $32.9 billion in 2020, $44.8 billion in 2021; Agricultural goods: $12.5 billion in 2020, $19.5 billion in 2021; Energy goods: $18.5 billion in 2020, $33.9 billion in 2021; Services: $12.8 billion in 2020, $25.1 billion in 2021. Manufactured goods include industrial and electric equipment, pharmaceuticals and vehicles.
ETFs in Focus Following U.S.- China Trade Deal:
Consumer: U.S. companies have paid $46 billion in tariffs since the start of the trade war over a year ago. Since the U.S. is still imposing tariffs on $250 billion in Chinese products, many companies many begin to pass the additional cost unto the consumer. Funds that will be effected by an increase in consumer cost include iShares U.S. Consumer Services ETF (NYSE: IYC), Consumer Discretionary Select Sector SPDR Fund (NSYE: XLP) and Consumer Staples Select Sector SPDR Fund (NYSE: XLY).
Industrials & Materials: Industrial Select Sector SPDR Fun (NYSE: XLI) and Materials Select Sector SPDR Fund (NYSE: XLB) are both subject to additional tariffs and will be affected by the ongoing tariff discussion between the two nations.
Technology & Semiconductors: Large-cap semiconductor companies like NVIDIA and Qualcomm have majority of their revenue exposure based in China, according to a Goldman Sachs' (NYSE: GS) study. Due to the relationship between the two sectors, their future performance will be affected by the continued tariffs between the U.S. and China. Funds that will be affected include SPDR S&P Technology Hardware ETF (NYSE: XTH), VanEck Vectors Semiconductor ETF (NYSE: SMH), Technology Select Sector SPDR Fund (NYSE: XLK).
Automotive: Due to steal and aluminum being vital to the production of cars, the longstanding tariffs on these materials will definitely affect the production and sales of various car brands. One fund to follow is First Trust Nasdaq Global Auto Index Fund (NASDAQ: CARZ).
Big Banks: As the financial markets have been on the rise ahead of the trade agreement and are poised to gain in 2020. While a popular trade is usually Financial Select Sector SPDR Fund (NYSE: XLF), according to John Davi, founder and chief investment officer at Astoria Portfolio Advisors, noted that "XLF is only 40% banks." A better trade for big banks is Invesco KBW Bank ETF (NYSE: KBWB) which is about 88% banks.
China: iShares MSCI China ETF (NYSE: MCHI) is a great way to benefit from the added trade between the two nations as per the agreement. A big focus as China becomes a more fierce entity in e-commerce, a good fund to focus on is KraneShares' CSL China Internet ETF KWEB (NYSE: KWEB). This fund focuses on Chinese internet companies that provide similar services like Google (NASDAQ: GOOGL), Facebook (NASDAQ: FB), Twitter (NYSE: TWTR), and Amazon (NASDAQ: AMZN). Chinese giants Alibaba (NYSE: BABA) and Tencent (OTC: TCEHY) make up 19% of the fund.
Health Care: Health Care Select SPDR Fund (NYSE: XLV) and SPDR S&P Pharmaceuticals ETF (NYSE: XPH) will benefit at least in the coming two years from the agreed relationship between the two nations.