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The Trump tariffs that markets have been fretting about for months are due to begin Feb. 1, potentially sending ripples through financial markets, creating winners and losers across various sectors and the exchange-traded funds that track their performance.
While domestically focused and defensive ETFs may gain traction as investors seek stability, those tied to export-driven industries or emerging markets may face headwinds.
Understanding how tariffs reshape the economic landscape is crucial for navigating these changes. This article explores the best-performing ETFs poised to thrive in this environment and highlights those most vulnerable to the potential fallout.
The tariffs, set to begin Saturday, include a 25% levy on a broad range of goods from Mexico and Canada. President Trump said last week that he was discussing with his administration a 10% punitive duty on Chinese imports, on top of tariffs currently in place.
Trump Tariffs: The Economic Backdrop
The Trump tariffs are expected to increase prices for various imported goods, particularly in the food sector. Items such as avocados, tomatoes, beef, pork, and a variety of fruits and vegetables, which are heavily imported from Mexico and Canada, may see significant price hikes. Economists predict that the average American family's annual grocery bill could rise by approximately $185, disproportionately affecting lower-income households.
Analyses indicate that these tariffs could generate approximately $140 billion in additional revenue for the U.S. over the remainder of 2025. If maintained, they could raise up to $1.5 trillion through fiscal year 2035. However, there is a risk of retaliatory tariffs from the affected countries, which could escalate into a broader trade conflict, further impacting international relations and economies.
Potential ETF Winners and Losers Amid US Tariffs
When the U.S. imposes tariffs on other countries, the performance of certain ETFs can be positively or negatively impacted, depending on their focus. While the duration and severity of the new levies is unknown, here's a breakdown of potential winners and losers, as measured by prominent ETFs in each respective category:
ETFs That May Perform Well During US Tariffs
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Domestically Focused ETFs: Funds that focus on companies with strong domestic operations and limited international exposure may be less affected by tariffs. This could include small-cap ETFs like the iShares Russell 2000 ETF (IWM) or ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) that may benefit if consumers shift spending toward domestically produced goods.
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Energy and Financials Sector ETFs: U.S. energy producers could benefit from increased domestic demand for energy as imports become more expensive while banks may benefit from higher interest rates that could result from inflationary pressures caused by tariffs. Top funds in these sectors are the Energy Select Sector SPDR Fund (XLE) and the Financial Select Sector SPDR Fund (XLF), respectively.
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Materials or Steel ETFs (if tariffs are favorable to US producers): The VanEck Steel ETF (SLX), which focuses on steel producers, can benefit from tariffs on foreign steel imports and the iShares U.S. Basic Materials ETF (IYM) may gain from US producers replacing imported goods.