Trump tariffs create uncertainty, especially for Canada’s export-led economy. Canada exports oil, gas, automotive components, and minerals. According to Edward Jones’s research, the TSX Composite Index earns around 30% of revenue from the United States. Changed policies, trade disruptions, and economic and currency shocks from the Trump administration could keep the market volatile for the short term. At times like these, how can you protect your investment portfolio?
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Three ways to protect your investment income from Trump tariff uncertainty
This is not the first time the stock market has faced uncertainty. It has withstood trade wars, the pandemic, geopolitical tensions, dot.com bumble, the financial crisis, and the oil crisis. Each crisis has taught lessons you can follow to not only protect your wealth but also boost your portfolio by investing at the bottom.
Strategy #1: Buy both U.S. and Canadian stocks of sectors affected by Trump tariffs
One method to protect your investments is to have a position in both parties. While there are no winners in a trade war, Canadian stocks stand to lose more than U.S. stocks because of their heavy dependence on the U.S. for revenue.
For instance, oil and gas stocks would be hit with a 10% tariff if implemented. The burden of tariffs will be partially offset by the weaker Canadian dollar. A tariff means higher gas prices for U.S. consumers. One method could be to buy U.S. oil and gas stocks as they will sell domestic produce or some stocks that will benefit from increased oil drilling in America.
Freehold Royalties (TSX:FRU) could be an opportunistic buy. The company holds approximately 1.1 million gross drilling acres in the United States. It earns royalty on the amount of oil produced and the price of oil and gas.
If Donald Trump wants to produce more oil domestically, Freehold will benefit from higher royalty payments in the U.S. dollar. Shareholders of Freehold could benefit from higher dividends and a stronger U.S. dollar as the company pays out 60% of the royalty earnings in dividends. Now is a good time to lock in an 8.4% dividend yield on Freehold Royalties.
Strategy #2: Buy the dip and sell the rally
Investing in U.S. oil and gas stocks doesn’t mean you sell Canadian oil and gas stocks like Enbridge (TSX:ENB). While short-term tariffs may affect earnings slightly, they would resume normal business in the long term. Enbridge has sustained the pandemic and the 2015 oil crisis with its low-risk business model and an already-established pipeline infrastructure. It has gradually extended its portfolio to gas pipelines and is tapping export markets other than the United States.
You could continue holding the stock if its dividends are a major source of your passive income. You could consider booking profits on a portion of your Enbridge holdings as the stock trades at an all-time high. If you purchased the stock near $40, you can get a 60% capital gain at $64.4 share price. Suppose you have accumulated 1,000 shares of Enbridge at an average price of $40, you could sell maybe 200 shares and get $12,880 (200 shares x $64.4). It is a trade-off between a $754 annual dividend ($3.77 x 200 shares) and a $4,800 capital gain (200 shares x $40).
Strategy #3: Take a long-term investing approach to Trump tariffs
Another effective strategy is to not react to a crisis. Fear and panic often make investors go on a sell mode. If you invested in a few stocks or ETFs for the long term, stay invested. Historical data has shown that the overall market gives a 9-11% average annual return in 10 years.
If you have been investing regularly in market and sector ETFs, continue investing even in a market downturn, as the recovery rally is equally rewarding. Regular investing reduces your average cost per unit and builds your wealth. BMO S&P/TSX Capped Composite Index ETF and iShares S&P/TSX Capped Information Technology Index ETF can give you exposure to the overall TSX performance and Canadian tech stocks. In the 2021 tech stock blood bath, the technology ETF fell 48%. However, it rallied 159% since October 2022 as the sector recovered, and the artificial intelligence wave drove it to new highs.
