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The Presidential election is now less than six weeks away and it still appears to be a close race. While the future direction of the country will be determined by who occupies the White House for the next four years, the near-term direction of the stock market will probably be determined more by other factors like the third quarter earnings, the events in Europe, macroeconomic data in the US and the fate of the fiscal cliff.
Many people believe that the stocks market fares well under Republican presidents due to lower taxes and less spending but history suggests that the there is no clear pattern of post-election stock marker behavior. (Read: 3 ETFs To Prepare For The Fiscal Cliff)
However it is almost certain that some sectors will fare better under President Obama while others may prosper if Governor Romney wins the election. So, it is time that the investors take a look at their portfolios and be prepared to realign their portfolios for the result of the election.
Below we take a look at two sectors that will benefit under the leadership of Obama and two that will benefit from a Republican victory and the ETFs that the investors can use to play those sectors. At the same time, the investors should remember that the pre-election promises do not always result in actions after the elections in politics. (Read: Invest like Mitt Romney with These Three ETFs)
Oil and Gas
Governor Romney says that the Obama administration’s decision to limit drilling in environmentally sensitive areas and over-regulation of energy industry are responsible for the high gas prices in the US.
In his policy paper on energy, Romney has pledged that his administration will dramatically increase domestic energy production and partner closely with Canada and Mexico to achieve North American energy independence by 2020. Romney wants more oil exploration, faster permitting, and state control of exploration on federal lands.
We expect the oil and natural gas companies to benefit if Romney wins the election. (Read: Three Biggest Mistakes of ETF Investing)
XOP tracks the S&P Oil & Gas Exploration & Production Select Industry Index. It charges 0.35% in expense ratio, while the yield is 0.85% as of now. The fund was introduced in June 2006 and has managed to attract $1.06 billion in AUM so far.
The ETF holds 72 securities, in weights ranging from 0.32% to 1.59% of total assets.
Romney supports less regulation on the financial sector. In particular, he has pledged repealing the Dodd-Frank financial Act and replacing it with more-streamlined regulation. He believes that the onerous regulations have weakened the economic recovery, as the banks focus on compliance instead of lending.
According to S&P estimates, the eight largest US banks stand to lose between $22billion and $34billion in annual revenue as a result of Dodd-Frank Act. Most of the projected costs would be due to Volcker rule. If the Dodd-Frank Act is repealed, big banks will benefit substantially.
Most likely Romney administration would come up with revamped version of the Act, which would accommodate some of the highly profitable but risky activities, by relaxing the rules governing thederivatives market andrestrictions oninvestments in private equity and hedge funds.
XLF which tracks the Financial Select Sector Index, is the most popular ETF in the financial services space, with more than $7.9 billion in assets. Further it is very cost-effective with just 18 basis points in expense ratio and very tight bid-ask ratios. (Read: Three Excellent Dividend ETFs for Safety and Income)
The ETF holds 81 securities but assigns more than 50% of the assets to its top 10 holdings, which include all big names in the financial sector. It pays out a decent yield of 1.67% currently.
If Obama is re-elected, healthcare sectorwill benefit since president's Affordable Care Act will increase the healthcare spending. Further, hospitals will no longer have to spend substantial money on providing emergency care to the uninsured. Overall the healthcare providers, service companies and the pharmaceuticals companies stand to benefit.
Mitt Romney on the other hand, plans to repeal the Obamacare.
XLV tracks the Health Care Select Sector SPDR Index, which includes companies mainly from the pharmaceuticals, healthcare providers and services and healthcare equipment and supplies industries. The ETF has more than $4.9 billion in assets and trades in heavy volumes. It is however slightly top-heavy with top 10 holdings accounting for more than 60% of the assets.
XLV charges a low expense ratio of 18 basis points while it pays out an attractive dividend yield of 1.93%.
President Obama supports a green-energy agenda and has reiterated his support for “development of cleaner and more energy-efficient technology”. His administration wants to extend the tax credits for clean energy companies that are set to expire at the end of this year.
Obama has spoken several times about his commitment to tackle the issue of climate change and to protect the environment. In his convention speech, the President reiterated commitment towards continued investment in clean coal, as well as wind and solar energy.
Romney believes that the clean energy is yet to become viable and the causes of climate change are unknown.
The investors can consider PZD to play this sector, if Obama wins. PZD tracks the Cleantech Index and invests at least 90% of its total assets in stocks of cleantech companies, from a broad range of industry sectors. The ETF is well diversified with 60 holdings, with the top holdings constituting less than 30% of total assets.
PZD charges 36 basis points to the investors for annual expenses and currently pays out a decent yield of 1.62%. Launched in October 2006, the fund has so far attracted $67.2 million in assets under management.
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