Sector ETFs & Stocks To Surge As US-China Trade Fear Ebbs

Wall Street’s biggest dampener for the last few months will be offset now as the United States and China put trade war on hold. The world’s largest economies dropped their tariff threats and set up a framework to address potential trade imbalances in the future.

China has promised to purchase more U.S. goods and services, including energy and agricultural products that would support growth and employment in the United States. Beijing has agreed to substantially reduce America's massive trade deficit but did not commit any specific amount. The Trump administration wanted to slash the deficit by $200 billion.

Though the talks are in the initial stage, it has cooled down tensions, which have heightened since the Trump administration proposed tariffs of $50 billion on Chinese goods and threatened to extend the levies to an additional $150 billion. China retaliated with its own measures targeting U.S. agriculture (read: ETFs to be Impacted by Potential Trade War With China).

As such, the news has instilled fresh optimism into the stock market with the major index closing the day at a two-month high. With both the United States and China working to avert trade war, the strong momentum in the stock market is likely to continue in the near term. This coupled with a growing economy and strong earnings will help the stocks to move higher.

This is especially true given that the U.S. economy has entered its second-longest expansion phase since 1785, thanks to higher consumer spending, rising consumer confidence, low borrowing cost, growing wages, 17-year low unemployment, and solid hiring. Total Q1 earnings for the S&P 500 index are expected to be up 23.9% from the same period last year on 8.5% higher revenues. This represents the highest quarterly earnings growth pace in seven years. Further, the euphoria surrounding the tax reform has been the biggest catalyst this year, as it will perk up the economy and save billions for corporations, leading to reflation trade and higher earnings.

While almost every corner of the market is set to surge, sectors that were at risk from China trade will likely benefit most. The U.S. information technology, materials, and industrials sectors have relatively high exposure to China's economy with 14.2%, 7.1%, and 5.6%, respectively, and are poised to perform well in the renewed rally. In particular, chip stocks dominate the list of tech sector with large sales exposure to China.

Below, we have highlighted ETFs & stocks from these sectors that are expected to outperform at least in the near term following the receding trade war fears:

Technology

VanEck Vectors Semiconductor ETF SMH: This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. The top 10 holdings accounts for 55.9% of assets. The product has managed assets worth $1.4 billion and charges 35 bps in annual fees and expenses. It has Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Reasons to Bet on the Rebound in Semiconductor ETFs).

Texas Instruments Incorporated (NASDAQ:TXN) : This is a global semiconductor design and manufacturing company that develops analog ICs and embedded processors. It has 32% exposure to China sales. The stock saw solid earnings estimate revision of 46 cents over the past month for this year and has an expected earnings growth rate of 26.87%. TXN has a Zacks Rank #1 (Strong Buy) and a VGM Score of C. You can see the complete list of today’s Zacks #1 Rank stocks here.

Materials

First Trust Materials AlphaDEX Fund FXZ: This product follows the StrataQuant Materials Index, holding 52 stocks in its basket. None of the securities holds more than 3.7% share. Chemicals dominates the portfolio with 35% of assets while metals & mining, and containers & packaging round off the next two spots with a double-digit allocation each. The fund has accumulated $315.6 million in its asset base and charges 65 bps in annual fees. It has a Zacks ETF Rank #2 with a Medium risk outlook.

Huntsman Corporation (NYSE:HUN) : This is among the world's largest global manufacturers of differentiated and commodity chemical products for a variety of industrial and consumer applications. It has seen solid earnings estimate revision of 23 cents for this year over the past month and is expected to generate growth of 25%. Huntsman Corporation has 14% revenue exposure in China. The stock has a Zacks Rank #1 and a VGM Score of A (read: Bet on These Sector ETFs & Stocks for Q1 Earnings).

Industrials

Industrial Select Sector SPDR XLI: This is the most popular ETF in the industrial space with AUM of $12.7 billion. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with each accounting for less than 8.4% of the assets. More than one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, and machinery make up for a double-digit share each. This ETF charges 13 bps in fees per year and has a Zacks ETF Rank #1 with a Medium risk outlook (read: April Jobs Data Mixed Bag: 3 Sector ETFs & Stocks to Gain).

The Boeing Company (NYSE:BA) : This is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. Boeing's sales in China accounted for 15% of its total revenue in 2017. The stock has seen solid earnings estimate revision of 54 cents for this year over the past 30 days with an expected growth rate of 21.35%. Being carries a Zacks Rank #2 and a VGM Score of B.

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The Boeing Company (BA): Free Stock Analysis Report

Huntsman Corporation (HUN): Free Stock Analysis Report

SPDR-INDU SELS (XLI): ETF Research Reports

VANECK-SEMICON (SMH): ETF Research Reports

FT-MATERLS ALP (FXZ): ETF Research Reports

Texas Instruments Incorporated (TXN): Free Stock Analysis Report

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