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5 ETFs Rising as 'Reflation Trade' Picks Up on Stimulus Hope

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Even after walking out on the stimulus talks, U.S. President Donald Trump has been seeking some much-needed aid approvals from Congress. Among the most-necessary ones, Trump wants an extension in the $25 billion in new payroll assistance to U.S. passenger airlines, furloughing thousands of workers amid downing travel demand.

Moreover, President Trump has indicated that he wants Congress to approve a stand-alone bill that would allow a second round of $1,200 checks. Both Democrats and Republicans have shown support for such aids, though it is still not clear if these proposals could be passed before the election.

Stimulus Tug-of-War Background

In the latest development on the ongoing U.S. fiscal stimulus negotiations, President Donald Trump unexpectedly stalled virus-related relief talks until after the election. “Democrats have proposed spending $2.2 trillion.”

The Trump administration has called that “unserious,” but raised the offer to close to $1.6 trillion, including a $400 weekly pandemic jobless benefit. Democrats want $600 a week,” per Reuters. Previously, Senate Republicans proposed $650 billion in total aid. But Trump urged “GOP lawmakers to go for a bigger coronavirus stimulus package.”

Momentum Gain in 'Reflation Trades'

Investors should note that Democrats and the White House have apparently agreed on a slew of relief provisions, “including another $1,200 direct payment to most Americans, funds for a second round of small business loans, money for schools and $25 billion to help cover airline payrolls as companies plan tens of thousands of furloughs,” per a CNBC article. This means that no matter who wins the election, some areas will likely get the relief package for sure.

Federal Reserve officials at their most recent meeting also stressed on the urgency of the fiscal assistance. Members said the economy was doing better than expected as the fiscal help provided by Washington acted as a great tailwind. Plus, the U.S. Federal Reserve last month signaled that interest rates are likely to stay at zero through 2023.

Stimulus hopes and Fed minutes made the yield curve steeper, with the gap between 5- and 30-year yields rising as high as 126 basis points on Oct 7. This is near the 2020 high reached in June, when the yield curve was the steepest since 2016. The 10-year breakeven rate of consumer price inflation — a market-based measure of average inflation rates over the next decade — hovers around 1.70%, having gained in six of the past eight sessions. No wonder, reflation trade would set in.

ETF Beneficiaries

iShares U.S. Regional Banks ETF (IAT - Free Report)

As regional banks fare well in a steepening yield curve environment, IAT jumped as much as 3.1% on Oct 7. The underlying Dow Jones U.S. Select Regional Banks Index of the fund is a free-float adjusted market capitalization-weighted index, which measures the performance of the regional bank sub-sector of the U.S. equity market.

iShares Russell 2000 ETF (IWM - Free Report)

The segment is likely to benefit no matter who wins the election as Trump supports the “America First” agenda while Biden endorses “Buy American.” This, in turn, would benefit small-cap ETFs as these are heavily dependent on domestic companies. IWM was up 2.2% on Oct 7 (read: Trump or Biden, Small-Cap Stocks & ETFs to Gain).

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

The U.S. manufacturing industry is in decent shape. The sector is likely to do well no matter who wins the election. The industrial sector could be a good pick for reflationary environment. The fund gained 2% on Oct 7.

iShares U.S. Consumer Services ETF (IYC - Free Report)

Both parties agreed on a $1,200 direct payment to most Americans. Some unemployment benefits will also likely to be approved post-election. This is a positive for consumer sector. The fund IYC was up 2% on Oct 7.

AI Powered Equity ETF (AIEQ - Free Report)

The technology sector is sure to gain as coronavirus crisis has brightened the allure of the sector. Moreover, this kind of cyclical sector normally performs well in a trending economy. The fund AIEQ was up 1.9% on Oct 7.

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