Exchange-traded fund investors are shaking up their portfolios to prepare for any fallout from the trade skirmish between the U.S. and China.
There’s been a rush into domestically oriented small-cap shares, and out of funds that hold Chinese technology companies. Industrial stocks, often seen as a trade barometer, have also been under the knife. And even when it comes to the broader S&P 500 Index, short bets are rising toward the highest levels of the year.
“It’s been difficult for an investor to balance the near-term headwinds and some of the volatility that we’re going to continue to see probably through the end of June at least, with the possibility that we do get a resolution,” Liz Young, a senior investment strategist at BNY Mellon Investment Management, said on Bloomberg Television.
Here’s how investors and traders are taking to ETFs to play the trade war:
Betting Against The S&P 500
Traders are ratcheting up bets that the S&P 500 is set to fall. Short interest as a percentage of shares outstanding on the SPDR S&P 500 ETF Trust, better known by its ticker SPY, has risen to 6.4%, according to data from IHS Markit Ltd. That’s just about in-line with the highs seen earlier this year in March.
Small-Cap Focus
Meanwhile, investors poured nearly $800 million last week into the iShares Russell 2000 ETF, ticker IWM -- the most since December. The argument for small-caps goes that increased tariffs will hit exporters hardest, while smaller American companies that get a smaller portion of their sales from overseas will emerge relatively unscathed.
“Small caps are relatively better positioned than large caps in a trade war,” Trevor Gurwich, a portfolio manager at American Century, said on Bloomberg Radio. “One, they have more general domestic exposure. Two, there are a lot more to choose from -- we have over 6,000 names we can screen for, and we can always find a company out there that’s not necessarily exposed to a trade war.”
Mad Dash From China