The Hang Seng Index briefly crossed into bear market territory at one point on Wednesday, losing over 20% from its recent high following the U.S.’s escalation of tariffs on Chinese imports.

Although the index pared some of the losses on Thursday with 2.1% gains after President Donald Trump decided on a 90-day pause, the shockwaves are being felt across a variety of U.S.-listed ETFs, focusing investor attention on trade-sensitive assets.

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ETFs Under Pressure

Direct exposure to Hong Kong has taken a tangible dent. The iShares MSCI Hong Kong ETF EWH, which tends to follow closely the performance of the Hang Seng, has tracked the index’s sharp depreciation over recent weeks. The fund has declined 12.26% in the past month. The ETF’s decline is reflective of investor disappointment in the region’s prospects for growth, as well as general concern regarding the build-up of geopolitical tensions.

But the effect extends well beyond Hong Kong-centric funds. A number of ETF categories with indirect exposure to China or global trade patterns are exhibiting signs of strain:

Emerging Market ETFs (Ex-China) such as the iShares Core MSCI Emerging Markets ex China ETF EMXC have experienced renewed popularity as investors attempt to avoid direct Chinese equity risk. Yet these funds are still exposed to general macroeconomic weakness due to the trade war. The shares in the fund have collectively declined about 3.4% over the past month.

Global Equity ETFs like the Vanguard Total World Stock ETF VT and iShares MSCI ACWI ETF ACWI are not isolated either. They both have positions in Chinese and Hong Kong equities, and although their diversification helps take the sting, the Asian equities pullback is starting to take its toll on overall return.

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U.S. Sector ETFs are also responding to the escalating tension.

Technology ETFs such as SPDR Select Sector Fund – Technology XLK are at risk from China’s revenue and supply chain disruptions. In the past four weeks, the fund has declined more than 6%.

Industrial ETFs such as the SPDR Select Sector Fund – Industrial XLI might be hit if Chinese tariffs bear on U.S. exports of manufacturing or essential imported parts.

Agricultural ETFs like the Invesco DB Agriculture Fund DBA might be hurt if China retaliates by restricting purchases of U.S. agricultural products.

Market Fallout

The Hang Seng’s brief plunge into bear market range — its most steep drop in more than a year — has increased worries about global economic stability. Washington’s plan to add tariffs on a wide range of Chinese merchandise ignited the decline in the index, which invited a retaliatory response from China — an 84% tariff on U.S. goods.

Although the initial impact has been on Chinese and Hong Kong markets, the wider implications are difficult to avoid. Investors can now expect greater market volatility as news surrounding trade talks continues to influence sentiment.

Possible further slowing of global growth, particularly if extended trade barriers limit cross-border investment and disrupt supply chains, are also on the cards.

Inflationary pressures within the U.S., with tariffs elevating the price of imported merchandise, can also potentially make the policy course of the Federal Reserve more challenging.

As trade tensions intensify, the performance of region-specific and sectoral ETFs provides a window into how markets are pricing in risk. With the Hang Seng’s fall serving as a canary in the coal mine, investors might need to rethink their allocations and brace for extended turbulence in the coming months.

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