Tariff trade and the best ETFs to play it

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Tariffs' impact are a ‘nothing burger’: Peter Navarro

Office of Trade and Manufacturing Policy Director Peter Navarro on the Trump administration's plans to impose tariffs on steel and aluminum.

President Donald Trump is doubling down on his plans to slap a hefty bill on steel and aluminum imports, with the promise to strengthen the U.S. steel industry and protect jobs.  The move to impose a 25% tariff on steel imports and 10% on aluminum imports is being met with pushback from prominent CEOs, and free-market economists, who favor open trade.  While details remain fluid, investors should be familiar with these ETFs if they want to play the tariff trade.

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While there is a steel sector-specific exchange traded fund on the market, ETF investors may do better with a metals and mining sector play. The action is seen as steps the president promised to make on his campaign trail when he claimed that trade policies of China and other countries have undercut the U.S., notably in the manufacturing segment.

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For ETF investor who want to capitalize on the tariff plans, some may immediately turn to the targeted VanEck Vectors Steel ETF (NYSEArca: SLX). However, potential investors should note that SLX follows global companies involved in the steel industry. The global steel ETF includes a 37.2% tilt toward U.S. steel, along with 19.1% Brazil, 13.3% Netherlands and 11.1% U.K. Since SLX includes more international than U.S. components, any tariffs could weigh on this ETF.


On the other hand, the broader SPDR Metals & Mining ETF (NYSEArca: XME) should also be considered.

Investors who want to focus on U.S. steel may find a better opportunity in XME, which includes a hefty 49.7% tilt toward steel producers, along with coal & consumable fuels 14.1%, aluminum 12.0%, gold 9.0%, silver 6.3% and copper 5.1%.

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XME tries to reflect the performance of the S&P Metals & Mining Select Industry Index, which is designed to track the metals and mining segment of the S&P Total Market Index, a broad U.S. equity market index. However, unlike the traditional cap-weighted indexing methodology, XME follows a more equally weighted approach.

This also goes to show that ETF investors should take the time to perform their due diligence when looking into an ETF option. It is important to consider an ETF's underlying holdings and indexing methodology before diving in.

Consequently, investors who want U.S.-based steel exposure may be better served with a play like XME, even if U.S. steel only makes up about half of the fund's portfolio, as there are no other targeted alternatives currently available.

This article was provided courtesy of our partners at etftrends.com.