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Sector ETF Winners and Losers on Trump Controversy

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Global stocks suffered a landslide on May 17, as the political scenario became more volatile owing to certain controversies surrounding possibilities of leakage of "highly classified information" to two top Russian officials by Donald Trump. In fact, Trump has reportedly asked former FBI chief James Comey to discontinue an investigation on former National Security Adviser Michael Flynn's ties with Russia, going by the source.

This gave way to panic sell-offs, with investors rushing to dump their Trump-induced bets as the Democrats demanded the impeachment of the U.S. President. In any case, Trump, who has so far been viewed as a pro-growth and pro-business leader thanks to his political vows of tax cuts, deregulations and fiscal boost, has been struggling to push his economic agendas through.

As a result, global equities had a bloodbath with the S&P 500-based ETF SPDR S&P 500 ETF Trust (SPY - Free Report) , SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) and PowerShares QQQ Trust (QQQ - Free Report) losing about 1.8%, 1.7% and 2.5%, respectively, on May 17.

Emerging market ETF iShares MSCI Emerging Markets ETF (EEM - Free Report) lost about 1.7% on May 17, Vanguard FTSE Europe ETF (VGK - Free Report) dropped about 1.4% and all-world ETF iShares MSCI ACWI ETF (ACWI - Free Report) shed about 1.5% on the day. Also, theU.S. dollar plunged to its lowest since last November.

In such circumstances, we highlight below those sector ETFs that could gain or lose considerably if the Trump controversy continues.

Winners   

Utility

Notably, the receding risk-on trade boosted the demand for safe-haven securities like U.S. treasuries. As a result, the yield on the 10-year benchmark U.S. Treasury nosedived to 2.22% on May 17 from 2.33% recorded the previous day.

This should bode well for utility ETFs like  Utilities Select Sector SPDR Fund XLU and Vanguard Utilities ETF (VPU - Free Report) (up about 0.3% each). The sector performs better in a low rate environment as being capital-intensive, it requires huge funding to carry out operations. The sector is high yielding in nature too. Utilities are also a safe bet given the non-cyclical pattern of their business.

REIT

High-yielding REITs also perform well in a low rate environment. Plus, economic recovery is also a boon for the sector. Though GDP growth of the U.S. economy in Q1 was somewhat subdued, the Q2 picture may turn around. As per the Atlanta Federal Reserve's GDP Now forecast, the economy is projected to grow at a 4.1% annualized pace in Q2 (read: Why to Buy REIT ETFs in 2017?).

REIT ETFs like Vanguard REIT ETF (VNQ - Free Report) and Real Estate Select Sector SPDR Fund XLRE (up about a respective 0.4% and 0.6%) actually ended in the green on May 17. Thus, these could prove to be good buys if the market falls prey to the uncertainties.

Consumer Staples

This is yet another safe and cyclical sector, which normally safeguards investor portfolio from bearish broader market conditions. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) lost only 0.2% on May 17, which is quite nominal compared to the steep decline in other securities (read: Should You Buy the Dip in Procter & Gamble via ETFs?).

Losers

Financials

The financial sector was supposed to be one of the key beneficiaries of the Trump bump. Trump’s promise of deregulation in the financial sector and chances of faster Fed rate hike this year drove the bullishness. Now, declining treasury yields and dwindling prospects of Trump-led reforms, at least in the near term, are likely to weigh on stocks.

The largest financial ETF Financial Select Sector SPDR (XLF - Free Report) lost about 3.2%, while SPDR S&P Bank ETF (KBE - Free Report) retreated about 4% on May 17. Since financial stocks do not perform well in a low rate environment (as the scenario hurts the companies‘ net interest margin), these ETFs couldn’t brave the steep slide in Treasury yields on the day (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Industrials

This was another Trump beneficiary, due to Trump’s promises of helfty infrastructure spending. With lesser chances of a renewed Trump rally in the near term, the Industrial Select Sector SPDR Fund XLI lost about 2% on May 17 (read: Likely ETF Winners and Losers from Trump Policies).

Defense

Trump had intended to boost military spending by about 10% to $54 billion in the U.S. in fiscal 2018 starting from October 1, 2017. This has benefited defense ETFs like SPDR S&P Aerospace & Defense ETF (XAR - Free Report) . Understandably, this sector ETF has come under pressure on May 17 as evident from about 2.3% losses in it (read: Trump's Defense Spending Plans Make these ETFs Buys Again).

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