In a move aimed at easing domestic food prices, U.S. President Donald Trump announced a temporary 90-day waiver last Friday on out-of-quota tariffs for up to 300,000 metric tons of imported ground beef trimmings. The policy suspends the customary duties that typically apply to beef imports exceeding established quota limits, effectively opening the floodgates for cheaper foreign beef to enter America.
This decision comes at a critical juncture for the American beef industry, considering the U.S. cattle herd has shrunk to its lowest level since 1951, caused by years of drought, rising feed costs and persistent inflationary pressures that have forced ranchers to reduce their herds. The smaller cattle herd has driven domestic beef prices to record highs, placing immense strain on foodservice operators, restaurants and ultimately consumers, who have been facing higher menu prices lately.
As a direct result of this tariff relief, wholesale ground beef costs are projected to decline meaningfully over the next three months. This should translate into immediate margin expansion for fast-food giants and meat distributors that rely heavily on blended beef products for their core menus.
Consequently, companies with significant exposure to ground beef consumption — alongside the exchange-traded funds (ETFs) that hold them — are well-positioned to benefit from this policy shift. Following the tariff waiver, lower input costs for imported lean beef trimmings should create a distinct opportunity for investors to capitalize on the improving profitability of these key players in the foodservice supply chain.
But before diving into the specifics of these ETFs, let us first examine the companies benefiting from this tariff waiver so that investors can make a fully informed decision about where to allocate their capital.
Key Corporate Beneficiaries of Lower Beef Costs
The primary beneficiaries of this tariff waiver fall into two distinct categories, each with its unique exposure to the ground beef supply chain.
The first one is the fast-food chains, which blend cheaper beef trimmings with domestic fatty cattle trimmings to produce their burger patties, taco fillings and other beef-based menu items. With wholesale costs expected to decline, operating margins for companies with heavy beef menus are set to expand significantly.
Under this category, McDonald's Corporation MCD, as the largest single buyer of beef in the United States, will perhaps be the most significant beneficiary of this waived tariff. MCD relies heavily on lean beef trimmings from global trade partners such as Australia and South America to manufacture its burger patties.
On the other hand, Yum! Brands YUM, while primarily known for KFC and Pizza Hut, is also expected to benefit from this policy shift through Taco Bell's massive ground beef consumption.
The second category of beneficiaries that stand to gain from the lower input costs of beef as a result of the 90-day tariff waiver is major meat processors and distributors. These companies with international sourcing networks are uniquely positioned to capitalize on the duty-free imports. They can blend lower-cost foreign beef with domestic trimmings, improving their processing margins and competitive positioning in the U.S. market.
These companies include JBS N.V JBS, the world’s largest meat processor, as well as food distributors such as US Foods Holding Corp. USFD and Sysco Corporation SYY, which purchase wholesale beef and distribute it to foodservice chains across America.
ETFs to Gain
Considering the aforementioned discussion, the following ETFs can be expected to gain from the recently waived tariffs on beef import.
State Street Consumer Discretionary Select Sector SPDR ETF XLY
This fund, with assets under management (AUM) worth $23.10 billion, offers exposure to 47 companies in specialty retail; broadline retail; hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; automobile components; distributors; leisure products; and diversified consumer services. MCD holds the fourth spot in this fund, with 4.16% weightage, while YUM holds the 29th spot with 1.07% weightage.
XLY has inched up 0.9% over the past year and charges 8 basis points (bps) as fees. It traded at a good volume of 4.16 million shares in the last trading session.
Invesco Leisure and Entertainment ETF PEJ
This fund, with a market value worth $373.2 million, offers exposure to 31 companies that are principally engaged in the design, production or distribution of goods or services in the leisure and entertainment industries. SYY holds the third spot in this fund, with 4.99% weightage, while USFD holds the 11th spot with 3.29% weightage.
PEJ has rallied 15.4% over the past year and charges 57 bps as fees. It traded at a volume of 0.02 million shares in the last trading session.
First Trust Consumer Staples AlphaDEX ETF FXG
This fund, with net assets worth $235.8 million, offers exposure to 40 stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. JBS holds the third spot in this fund, with 4.59% weightage.
FXG has risen 2.3% over the past year and charges 63 bps as fees. It traded at a volume of 0.002 million shares in the last trading session.
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McDonald's Corporation (MCD): Free Stock Analysis Report
Yum! Brands, Inc. (YUM): Free Stock Analysis Report
Sysco Corporation (SYY): Free Stock Analysis Report
State Street Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
First Trust Consumer Staples AlphaDEX ETF (FXG): ETF Research Reports
Invesco Leisure and Entertainment ETF (PEJ): ETF Research Reports
US Foods Holding Corp. (USFD): Free Stock Analysis Report
JBS N.V. (JBS): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).