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ETFs to Profit from Vitriolic US-North Korea Relations

The escalating tension between the U.S. and North Korea has jolted the high-flying global stock market fueled by solid corporate earnings and growing economic growth. This is especially true as Trump has warned North Korea that it would face "fire and fury like the world has never seen" if it continues to threaten the U.S.

The warning came following a Washington Post report which cited that North Korea has developed a nuclear weapon small enough to fit on a missile. Trump’s aggressive reaction has led to fears of a nuclear war as North Korea retaliated with a threat that it is seeking a missile attack on the U.S. Pacific territory of Guam, which is home to a large U.S. military base, in mid-August (read: South Korea ETFs in Focus on Rising Military Tensions).

The tension between the two countries has escalated after the State Department prohibited U.S. citizens from traveling to North Korea effective September 1 and United Nations Security Council imposed new tough sanctions last week. The sanctions include a ban on North Korean exports of coal, iron, iron ore, lead, lead ore, and seafood; prohibiting countries from increasing the current number of North Korean laborers working abroad; ban on new joint ventures with North Korea; and an embargo on any new investment in the current joint ventures. These sanctions could slash North Korea’s $3 billion annual export revenue by a third.

Market Impact

The events shook the complacency in the stock market, compelling investors to dump riskier assets and take flight to safety at least for the near term. If relations between North Korea and the U.S. embitters even more, it may be catastrophic for the stock markets at least for the near term. In fact, Dow Jones has lost in the last two days on rising geopolitical risk, snapping its 10-day winning streak on August 8. The index is also down nearly 0.4% in early trading at the time of writing, pointing to another rough start.

As such, the short-term pain could be quite severe, especially if we use SPDR Dow Jones Industrial Average ETF DIA as a proxy (read: Dow at Record High: More Upside for ETFs?).

Meanwhile, the CBOE Volatility Index, also known as the fear gauge, spiked 11.9% to 11.11 over the past couple of days. This suggests that fears have started to set in the market. Many American stocks are being hit by this turmoil too, except for a defense and a few defensive stocks.

Against such a backdrop, investors could stash their cash in the following ETFs that offer stability or even profit as U.S.-North Korea relations keep everyone on the edge of their seats:

SPDR Gold Trust ETF GLD

Gold is often viewed as a store of value and hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick in the current market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $31.8 billion and heavy volume of nearly 7.5 million shares a day. It charges 40 bps in fees per year from investors. The ETF gained about 1.5% in the past couple of days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Will Gold ETFs Shine in August?).

iShares 20+ Year Treasury Bond ETF TLT

The products tracking the long end of the yield curve often provide a safe haven. TLT provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $6.9 billion and average daily volume of more than 8.2 million shares. Expense ratio comes in at 0.15%. Holding 33 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.13 years and effective duration of 17.50 years. It was up 0.2% in the same time frame. Though the short-term outlook looks promising on the ongoing turmoil, the long-term outlook is negative given the Zacks ETF Rank of 4 or ‘Sell’ rating with High risk outlook. This suggests that the uncertainty in the market might not last long.

Guggenheim CurrencyShares Japanese Yen Trust FXY

Yen is considered a safe haven currency in times of uncertainty. Investors could tap this via FXY which appears a great way to play a future rise in the yen relative to the U.S. dollar. It tracks the movement of the yen relative to the U.S. dollar, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Japanese yen. The fund charges 40 bps a year in fees and sees a good volume of roughly 161,000 shares per day. The product has accumulated $112.7 million in its asset base and added 0.7% in the same period. It has a Zacks ETF Rank of 3 with a Medium risk outlook.

iPath S&P 500 VIX Short-Term Futures ETN VXX

While volatility products have been terrible performers over the medium and long term due to a contangoed market and a steep roll cost, VXX seems to have outperformed, having gained about 5.5% in the past two sessions. The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second month VIX futures contracts. The note has amassed nearly $1.1 billion in AUM and charges 89 bps in fees per year. Volume is extremely solid as it exchanges more than 58 million shares per day (read: Can These ETFs Manage Risk and Avoid Black Swans?).

ProShares UltraPro Short Dow30 SDOW

If investors are looking for an outright bet against U.S. equities, then an inverse ETF will be the way to go. A fund like SDOW that offers to pay the opposite of the return of a U.S. benchmark will likely make profits in this uncertain time. This ETF delivers the three times leveraged inverse return of the Dow Jones Industrial Average. The fund has accumulated $261.6 million in its asset base and trades in solid volume of 479,000 shares a day on average. It charges 0.95% in expense ratio and gained 0.7% in the last couple of days.

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ISHARS-20+YTB (TLT): ETF Research Reports
 
SPDR-DJ IND AVG (DIA): ETF Research Reports
 
CRYSHS-JAP YEN (FXY): ETF Research Reports
 
GOLD (LONDON P (GLD): ETF Research Reports
 
IPATH-SP5 VX ST (VXX): ETF Research Reports
 
PRO-ULS DOW30 (SDOW): ETF Research Reports
 
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