Winning ETFs under Obama

by: Don Dion

When Obama takes office in January, he will inherit a host of economic problems—from subprime mortgages to unemployment—and his campaign messages of hope and change will be put to the test in one of the most brutal and unforgiving arenas imaginable: U.S. equity markets.

While some ETF investors are leery about the toll that the political transition will render on their investments, others view this period as an opportunity to reallocate their ETF portfolios or invest additional capital in sectors of the economy that could benefit from an Obama administration. In a videoconference released November 5, Don Dion, publisher of ETF Report and Sector Momentum Tracker, noted that “big events, like elections, have an impact on long-term portfolio performance, and investors should make changes to their portfolios, especially in light of Obama’s presidency.”

Healthcare, the touchstone of the Obama campaign, will undoubtedly be impacted by the president-elect’s universal healthcare proposal. Pharmaceutical ETFs, including PowerShares Dynamic Pharmaceutical (NYSEARCA:PJP), could have a more difficult time in an administration marked by a transition toward generics. Healthcare providers, on the other hand, could flourish as more individuals take advantage of healthcare. As more Americans become insured and begin scheduling appointments and yearly physicals, ETFs such as iShares DJ U.S. Healthcare Providers (NYSEARCA:IHF) could become beneficiaries of an expanding healthcare system.

IHF tracks the Dow Jones U.S. Select Health Care Providers Index of companies in the healthcare providers subsector. Included in the index are owners and operators of health maintenance organizations, hospitals, clinics, dentists, opticians, nursing homes, and rehabilitation and retirement centers. As the demand for healthcare grows under universal healthcare initiatives, more Americans could seek these services, boosting such IHF components as Aetna, which provides healthcare, group insurance and large case pension insurance.

Obama’s campaign addressed the energy crisis by lauding oil alternatives—a plan that may bode well for some alternative energy ETFs. While ETFs heavily loaded with large oil companies, such as iShares Oil & Gas (NYSEARCA:IEO), could feel the pressure of an energy shift, natural gas ETFs, such as First Trust’s Revere Natural Gas Fund (NYSEARCA:FCG), could benefit from the conversion. As other clean energy alternatives are probed for viability, funds such as PowerShares WilderHill Clean Energy (NYSEARCA:PBW) could gain momentum.

Obama has emphasized the need for U.S. energy independence throughout his campaign—pledging $150 billion over the next 10 years to renewable energy sources. If Obama also achieves his proposed requirement for utilities to make 10% of their electricity reusable, clean energy portfolios could receive an even larger upswing. In an article in Fortune magazine detailing the potential for PBW, senior writer Jon Birger asserts that “the case for buying this ETF is simple” in an Obama administration. When discussing Obama’s proposals, Birger concludes, “All of this adds up to a potential bonanza for the solar, wind, biofuel and other companies included in PBW.”

Some investors also believe that there are opportunities in the financial sector during the economic downturn. “For investors with a long-term outlook, this is a good time to begin investing in the financial sector,” Dion said. As Obama goes to work adjusting and implementing the $700 billion financial rescue plan, ETFs such as iShares Regional Banks (NYSEARCA:IAT) could pick up steam as strong local banks separate themselves from the stigma of their larger sector mates.

Investors should also keep a close eye on ETFs that contain preferred financial stock, like iShares U.S. Preferred Stock (NYSEARCA:PFF), as dividend laws could change under an Obama presidency. Some U.S. banks, like U.S. Bancorp, have paid high dividends even in the midst of economic turmoil. If Obama raises taxes on dividends, some of these companies may have to cut dividends, in a move that could impact ETFs that focus on high-dividend equities.

American investors have asked for change, and the advent of Obama’s presidency could instill the confidence needed to rally consumer-driven tech. Obama’s focus on energy solutions could also mandate the need for new technology, a trend that could benefit funds like iShares Dow Jones U.S. Tech Sector (NYSEARCA:IYW). Semiconductor innovators, which would be instrumental to a national wind power initiative, could benefit from Obama’s policies. PowerShares Dynamic Semiconductors (NYSEARCA:PSI) could be among the ETFs that benefit from a semiconductor boost.

While the upcoming transition to an Obama White House may add uncertainty to an already gun-shy marketplace, ETF opportunities exist in sectors that stand to benefit from Democratic policies. Sector ETFs have the unique feature of offering investors exposure to “sectors of sectors” that could outperform in Obama’s administration. While the broader energy sector—including oil and gas—could experience volatility as clean energy policies are implemented, ETFs offer investors unique opportunities, like PBW, to participate in the clean energy play.