Back to top

Image: Bigstock

ETFs to Watch Ahead of Georgia Senate Runoff

Read MoreHide Full Article

Stocks came crashing on the first day of the New Year in apprehension of the outcome of the Georgia Senate runoff. The election results would determine which party will control the Senate.

Since November, Wall Street rallied on hopes of a divided Congress. Hence, a Democratic win of the two contested Senate seats could trigger a 6% to 10% selloff in the markets, according to Oppenheimer strategist John Stoltzfus, as quoted on Yahoo Finance.

Why the Concerns?

Wall Street probably does not want the political power to get stored in a single party’s hand. This is especially true given the fact that House is mainly controlled by Democrats and a source of power for the President-elect Biden. 

A divided congress or balanced government means status quo, which may stop big changes to policies. Some of Biden’s proposed policies (like tax hike) may not see an easy passage due to gridlock.

Notably, President Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. But Democrat Biden’s plan is to hike the corporate tax rate to 28%.

”In addition, a Democratic sweep in Georgia would likely see a boost in new government program creation and spending at a time when many voters” and market participants are worried about the inflated debt level, said the Oppenheimer strategist.

Which ETF Areas Should Be Watch Out For?

Against this backdrop, below we highlight a few sector ETFs that are in high risk. Those could gain on a divided Congress but could lose if Georgia election produces Democratic winners.

Total Market ETFs

Biden’s tax plan means a somber Wall Street. Firstly, Biden’s plan to increase the capital-gains tax could result in a large-scale stock sell-off, according to economic analyses, as quoted on CNBC. In 1986, as part of the Reagan tax plan, the top rate for capital gains surged from 20% in 1986 to 28% in 1987. Just before the hike, capital gains’ realizations shot up by 60%, the CNBC article noted. An overall stock market selloff means a short-term rough patch for the likes of iShares Core S&P Total U.S. Stock Market ETF (ITOT - Free Report) .

Biotech & Healthcare

If there is a divided Congress, drugmakers and health insurers would benefit. “Even though drug pricing and reimbursement reform have seen support from both Democrats and Republicans, we expect the Senate’s filibuster-proof, 60-vote supermajority requirement to pass major legislation will shield the biopharma industry from the most controversial reforms,” SVB Leerink Geoffrey Porges told clients in a research note a few months back, reports Bloomberg, as quoted on Aljazeera.com.

iShares U.S. Healthcare Providers ETF (IHF - Free Report) and Invesco Dynamic Pharmaceuticals ETF (PJP - Free Report) should be closely tracked.

Banks   

Banking stocks were rather beaten down in 2020 as fears of higher defaults at the household and corporate levels hit the space hard due to economic slowdown. Risk-on trade sentiments (an outcome of a divided Congress) would boost the long-term treasury yields. This would be beneficial for banking stocks’ net interest rate margins. 

If Democrats win, things could turn bitter. Under Biden's plan of tax hike, the 10 largest U.S. banks may see their combined annual net income decline by more than $7 billion, according to an S&P Global Market Intelligence analysis.SPDR S&P Regional Banking ETF (KRE - Free Report) should be kept a tab on.

Alternative Energy

The alternative energy space has always been supported by the Democratic leaders. If Democrats rule the Congress, the stocks and ETFs in the space will get a boost.  Biden is forming a plan — a Clean Energy Revolution — to address the issue of climate emergency. He sees America becoming a 100% clean energy economy and net-zero emissions no later than 2050. The move could further benefit ETFs like Invesco Solar ETF (TAN - Free Report) and iShares Global Clean Energy ETF (ICLN - Free Report) .

Manufacturing & Infrastructure

While tax hike is a negative for Wall Street, Biden’s push for tax incentives will encourage domestic manufacturing. Biden’s campaign aims to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access, and updating schools among other works. iShares U.S. Infrastructure ETF (IFRA - Free Report) andInvesco Dynamic Building & Construction ETF (PKB - Free Report) should be closely watched.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>