President Trump’s first speech to Congress was a triumphant one with the Dow Jones Industrial Average steering past the 21,000 bar and most other corners of the investing world swinging in optimism. Hopes of solid fiscal reflation and deregulation actually fueled an already fired up rally on Wednesday.
Though markets gave up most of their gains the next day on rising rate concerns and profit booking, the underlying sentiments are still bullish. That said, even in this spell of optimism, some parts of the investing world are likely to be in the red in the Trump era.
Below we highlight those ETF areas that could gain or lose on Trump’s promised policies.
Trump’s promise of deregulation in the financial sector and increasing chances of Fed rate hike this month took financial stocks to new highs. Benchmark Treasury bond yields jumped 10 bps to 2.46% on March 1, 2017 from the previous day. This rising rate environment would make a great situation for financial stocks as these boost net interest margin. The largest financial ETF Financial Select Sector SPDR (XLF - Free Report) – with a Zacks ETF Rank #1 (Strong Buy) – added about 2.85% on March 1, though it shed 1.55% the very next day (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).
President Trump intends to boost military spending by about 10% to $54 billion in the U.S. in fiscal 2018 starting from October 1, 2017. This makes defense ETFs like SPDR S&P Aerospace & Defense ETF (XAR - Free Report) (up 1.3% on March 1) and PowerShares Aerospace & Defense Portfolio (PPA) (up 1.5% on March 1)winners.However, the funds retreated the very next day probably due to profit booking.Both funds have a Zacks ETF Rank #1.
The allure of municipal bonds generally lies in the fact that they make an excellent choice for investors seeking a steady stream of tax free income. Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making them especially attractive for investors in the high tax bracket, looking to reduce their tax liability.
However, with the President-elect planning to slash individual income-tax rates massively, the $3.7 trillion municipal market is bound to suffer as investors’ incentive from these tax-exempt bonds fall. Also, with the Fed planning to raise interest rates faster this year, the appeal of muni bonds – relatively higher current income than treasuries – is likely to be marred.
As a result, muni bond ETFs are out of favor now though most of the other corners of the market have been in a rallying mode. Funds like SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB - Free Report) and VanEckVectors High-Yield Municipal ETF (HYD - Free Report) have a Zacks ETF Rank #5 (Strong Sell) each. These funds were in the red on March 1 (read: What Lies Ahead for Muni Bond ETFs in the Trump Era?).
Trump promised to enhance military spending at the cost of lower targeted expenditure at programs like the Environmental Protection Act. The President in fact favors the fossil-fuel based businesses of coal, oil and gas and has expressed skepticism about global climate change in his campaign. This should hurt clean energy ETFs like Guggenheim Solar ETF (TAN - Free Report) (down 0.6% on March 1). It has a Zacks Rank #5 (read: Trump's Victory Casts a Shadow Over Solar ETFs).
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