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Must-Watch ETF Areas Before Mid-Term Elections

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U.S. mid-term elections are just hours away. As of now, chances are high of an outcome consisting of a Democratic-controlled House and Republican-majority Senate. The election-eve NBC News/Wall Street Journal poll shows Democrats taking a lead by seven percentage points, 50% to 43%. The second-likely scenario could be GOP controlling both chambers and third and the least likely chance is the sweeping victory of democrats.

Against this backdrop, below we highlight a few ETF areas that should be under watch ahead of mid-terms.


Defense is Now a Safe Bet

This should be a win-win area. If democrats gain power, they may add heightened IT spending to the department, which in turn would boost next-gen security companies, per SPDR. Even if there is a divided government, any major fiscal tightening is improbable in aerospace and defense stocks, despite Democrats pledging to roll back the Trump tax cuts passed in late 2017, per an article published on CNBC. SPDR Kensho Future Security ETF XKFS and First Trust NASDAQ Cybersecurity ETF CIBR should gain.

Also, Trump appears aggressive in foreign policy and signed the $717-billion 2019 defense spending bill into law — the largest allotted to U.S. defense ion August. So, defense and aerospace ETFs like iShares US Aerospace & Defense (ITA - Free Report)  and ETFMG Drone Economy Strategy ETF (IFLY) should  see healthy trading (read: How to Invest in the Hottest Technologies With ETFs).

Healthcare Under the Spotlight

Trump’s announcement of the drug plans in May was in the best interest of pharma companies. The drug plans will likely put pressure on U.S. trading partners, forcing them to pay more for medicines. So, the immediate impact should be positive on pharma ETFs like Invesco Dynamic Pharmaceuticals ETF PJP (read: Pharma & Biotech ETFs Soar on Trump's Drug Plan).

And in case of Democrats’ overpower, measures for healthcare availability and benefit to hospitals will come in the forefront, benefiting SPDR S&P Health Care Services ETF (XHS), per SPDR.

Energy at a Critical Juncture

Energy is in a critical stage. Taking a completely difference stance from former president Obama, Trump is pushing for more fossil fuel generation, be it from crude oil, natural gas or coal. So, ETFs like VanEck Vectors Coal ETF KOL and SPDR S&P Oil & Gas Equipment & Services ETF XES will be in a sweet spot.

On the other hand, Democrats will contest the newly proposed and less restraining Affordable Clean Energy (ACE) rule. Democrats are in favor of clean power initiatives like solar and wind.ETFs like iShares MSCI ACWI Low Carbon Target ETF (CRBNand First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) should benefit if there is a dividend congress.

Bet Big on Infrastructure & Utility

Whatever be the nature of congress, infrastructure should win. Donald Trump is in favor of beefing up public spending by hundreds of billions of dollars on infrastructure. Democrats also prefer a larger infrastructure package, enough to make an impact in the 2020 election. Democrats intend to fund such huge projects by new taxes, like a carbon tax, per an article published by SPDR.

Thus, Utilities ETFs like First Trust Utilities AlphaDEX Fund FXU or construction ETFs like Invesco Dynamic Building & Construction Portfolio ETF PKB and SPDR Kensho Intelligent Structures ETF (XKII) are likely to benefit from this trend.

Tax Cuts in Conflicting Situation

While Republicans intend to push the Tax Cuts and American Jobs Act of 2017 further, Democrats’ eye is on repealing portions of the measure. So, if Republicans gains an upper hand, the broader stock market should go higher with, putting focus on the likes of SPDR S&P 500 ETF SPY and Invesco QQQ Trust (QQQ) (read: 5 Winning Sector ETFs as Trump's Tax Reform Turns 6 Months).

Other beneficial zones would be iShares Russell 2000 ETF (IWM) (as domestically focused small-cap companies pay huge taxes in America and personal tax cuts would boost spending and favor small-cap stocks) as well as Invesco KBW Regional Bank Portfolio KBWR (this is because the gain from tax reforms for large-cap banks were in the 4% to 12% range, while small-caps probably have seen a boost of 7% to 17%, per CNBC) (read: GOP Nears Tax Reform: Buy These ETFs).

And if there is a divided congress, depth and width of tax cuts could be lessened. As a result, interest rates take a dive and in turn boost dividend ETFs, per SPDR. Vanguard High Dividend Yield ETF (VYM) and ProShares S&P 500 Dividend Aristocrats (NOBL) could be in focus.

Trade Tensions with China

President Trump’s relation with China is going through peaks and troughs. If both parties fail to come to a resolution, Trump’s popularity will hint at the continuation of the trade war with China. Goldman Sachs believes that “the President's veto power and the lack of political consensus regarding appropriate trade policy reduce the likelihood that either Democrats or Republicans enact legislation that will resolve the ongoing trade tensions." So, China ETFs like iShares China Large-Cap ETF FXI may be vulnerable at the moment.

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