3 Ways To Profit From Trump’s Tariffs
Trump’s tariff talk has thrown stocks into disarray. No one knows just how this new twist will play out in the economy. It appears to be a safe bet that whatever happens, it will not be bullish for stocks.
#-ad_banner-#Long-term investors have a choice to ride out the volatility or take action to attempt to increase profits during the uncertainty.
Should you decide to actively invest during these volatile times, here are three ways to make the difficult times work for you.
1. Get Long The VIX
Hedge funds and professional traders were thrown for a loop in February as the time-proven short VIX trade blew up. Over the last several years, a significant source of alpha for derivative traders and longer-term investors was short volatility. As long as volatility declined or stayed stable, short biased option strategies and just outright short trades created profits month after month.
Then Trump’s tariff talk combined with the regime of climbing rates sent the market to the loony bin. The VIX spiked and stocks plunged, calling the bluff of everyone but the most seasoned investors.
While no one knows what the future holds, my bet is the VIX is going to climb higher. This means that getting long the VIX in an adverse risk way makes sense. Make no mistake, investing in the VIX is fraught with dangers, the least of which is guessing wrong on direction. Time decay — ETFs meant to follow the index lagging, known as “contango” in futures, and a host of other structural issues — makes the VIX a tricky animal to profit from. However, if done correctly, it can be hugely profitable. Just be aware of the hazards!
The best way I have found to get long the VIX is via ETFs that combine equities with a volatility hedge. The PowerShares S&P 500 Downside Hedged ETF (NYSE: PHDG) is my choice. The reason being is that it is not a straight volatility directional instrument. It is actively managed and seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. It is excellent for hedging your portfolio against downside risk while having some exposure to the VIX.
While money can be made with straight VIX plays, they are just too risky for all but the most experienced, active traders.
2. Short The Market
Allocating a portion of your capital on the short side is an intelligent move right now. There are two strategies that can make sense going into the expected higher volatility from Trump’s tariffs and even just his rhetoric.
The first strategy is to short individual stocks or options on the stocks most likely to suffer the most from the tariffs. Right now, it will likely be the stocks of companies that rely the most on steel and aluminum to profit. Names like Ford (NYSE: F) and Boeing (NYSE: BA) come to mind as prime long-term short candidates. Remember, these stocks will likely suffer over the longer term rather than have a sharp short-term reaction.
Other stocks that may suffer from the tariffs include those that are massive exporters into China and whatever other nation Trump decides to target.
One can merely short the stocks directly or buy longer-term puts (LEAPS) to attempt to capture the downside.
The second, more overall bearish strategy, is to short the overall stock market. This can be done in several ways. The easiest way to short the overall market is to directly buy bearish ETFs on the S&P 500. ETFs like ProsShares Trust- ProShares Short S&P 500 (SH) and Direxion Daily S&P 500 Bear 1X are among my favorite. Other strategies include merely shorting the S&P 500 ETF (SPY) or the Dow Jones Industrial ETF (DIA).
Sophisticated investors can open up a futures account and short the e-mini DJIA (YM) or the E-mini S&P 500 (ES). The futures provide the most direct exposure without the lag often associated with ETFs. However, they are much more volatile and require expertise in trading to successfully manage. Futures are not for the inexperienced or faint of heart!
3. Go To Cash
Many investors don’ t realize that cash is a strategy. Going to cash means selling the majority of your equities to build a cash moat during times of uncertainty. The idea is to wait out the volatility then attempt to buy at the market lows, in this case after Trump’s tariffs have done their damage. Doing this can be tricky, and you will likely not catch the exact bottom. However, plenty of profits can be earned by waiting for the market to turn before entering. Of course, you will miss all the move, but capturing the meat of the movement makes sense.
Risks To Consider: Betting on an outcome, no matter how confident it seems, is very risky in the stock market. Anything can happen in the Trump tariff saga so be prepared for the unexpected. Always use stops and position size properly when investing.
Action To Take: Depending on your risk tolerance, consider implementing one or more of the three strategies.