(Bloomberg) -- Concerns that a global trade war could trigger global inflation is sending cash flooding into exchange-traded funds that stand to benefit and out of those that likely would be hurt.
Last week, investors poured a record $334 million into the Vanguard Materials ETF, ticker VAW. At the same time, they pulled $96 million from the Vanguard Industrials ETF, ticker VIS, the largest amount in more than a year. It’s a classic rotation -- grab exposure to the expected winners and dump the potential losers.
Trade policy whipsawed markets last week as investors speculated over what President Donald Trump’s tariffs would entail. The administration ultimately imposed a levy of 25 percent on steel and 10 percent on aluminum, but it exempted Canada and Mexico and gave other countries some wiggle room. The move is expected to increase prices, particularly on the commodities in question, which would benefit materials companies and hurt industrials.
“Putting in tariffs ultimately becomes an inflationary event, and within the equity market, if you’re going to have inflation fears go through the equity market, you would expect that materials stocks would outperform,” Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management, said by phone. “You kind of have a bit of an inflation hedge in your portfolio.”
The Vanguard Materials ETF has its largest allocation in chemicals companies, which make up about 62 percent of the fund, while iron and steel account for just 6 percent. To Paulsen, the fund may be getting cash because of trade woes, but ultimately it stands to gain if a trade war triggers inflation.
That’s a stark contrast to the industrials sector, which could take a hit under the same scenario. General Electric Co. is the third largest component of VIS and is one of the companies most at risk from rising steel and aluminum prices, according to Deutsche Bank analysts. Aerospace and defense make up nearly a quarter of the fund -- and analysts at Bernstein say tariffs are a “negative” for the group.
“For materials stocks, their primary revenues are all tied to commodities in one fashion or another,” Paulsen said. “If inflation fears are rising, you’d think the commodity prices are going to continue to climb. And if they do, that just directly hits their top lines.”
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