Since Woodrow Wilson re-instituted the practice of delivering the State of the Union Address in person in 1913, the annual event has evolved dramatically. The introduction of radio and television brought the presidential speech into millions of households, attracting increased interest and, of course, increased scrutiny. Thanks to the proliferation of 24 hour news networks and the realization that politics sells ad slots, the address has now become a major event surrounded on both sides by days of speculation, analysis and rebuttals.
While the annual event presents an opportunity to look back at recent accomplishments, it also serves as a platform to launch initiatives that can shape the country’s regulatory environment and structure of the U.S. economy. And while the ideas lobbed out during the State of the Union won’t necessarily translate into policy shifts and fulfilled promises (some would argue that they hardly ever do), an unveiling of the president’s agenda can be valuable information for investors looking to identify corners of the economy that may be poised for growth or may face new obstacles. Below, we highlight a few of the potential ETF winners and losers from the 2011 State of the Union.
Alternative Energy: Not surprisingly, the State of the Union included plans to increase the use of clean energy and reduce dependence on foreign oil. The president set a new, long-term goal in his speech, calling for 80% of U.S. electricity to stem from clean energy by 2035. “Some folks want wind and solar. Others want nuclear, clean coal, and natural gas,” Obama said. “To meet this goal, we will need them all – and I urge Democrats and Republicans to work together to make it happen.”
Investors would be justified in viewing the renewed commitment to alternative energy with some skepticism; despite being a pillar of campaigns for both parties for the last several decades, the clean energy industry in the U.S. has been moved to the back burner and eclipsed by more aggressive efforts from China and other countries. The setting of aggressive timelines for the adoption of alternative energy sources has become a common component of stump speeches and campaign promises, while follow through on these proposals has to this point been minimal.
The Alternative Energy ETFdb Category contains funds focusing on all of the sectors mentioned last night, including wind (NYSEARCA:FAN), solar (NYSEARCA:TAN), nuclear (NYSEARCA:NLR), and broad-based alternative energy ETFs (NYSEARCA:PBD).
Infrastructure: Obama also emphasized that the U.S. has been surpassed by many foreign nations with respect to infrastructure and technology. “Our infrastructure used to be the best, but our lead has slipped,” Obama said. “South Korean homes now have greater Internet access than we do. Countries in Europe and Russia invest more in their roads and railways than we do. China is building faster trains and newer airports.” That assessment was followed by a pledge to launch new efforts on high speed rail, road and airport construction, and a “National Wireless Initiative.”
If those efforts are indeed launched, it could be good news for infrastructure ETFs such as the iShares S&P Global Infrastructure Index Fund (NYSEARCA:IGF), as well as building and construction ETFs that offer exposure to engineering firms.
Treasuries: To many Americans, the State of the Union address signaled a move toward the center by the Obama administration, as evidenced by his proposal to freeze non-security discretionary spending for five years (though last year’s address featured a similar proposal that was never acted upon). While the initiative pertains to a relatively minor portion of the total budget - it excludes defense, Social Security and Medicare programs - it was a welcome development for deficit hawks anxious to reel in a ballooning government debt burden. “A five-year spending freeze is a first step,” said Sean Simko, head of Fixed Income Management at SEI Investments. “There need to be many steps that follow. The Treasury market should react positively to the points around spending cuts.”
Hopes that the government could narrow its $1.3 trillion budget gap could give a boost to the Government Bonds ETFdb Category, as a smaller debt burden would boost the appeal of securities issued by the U.S. government.
From an investment perspective, there weren’t many negative surprises from the State of the Union. The biggest losers from the night were likely in the energy sector, as Obama vowed to eliminate subsidies to the oil industry. “I don’t know if you’ve noticed, but they’re doing just fine on their own,” said Obama. “So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”
The Energy Equities ETFdb Category includes a variety of broad-based and more targeted funds offering exposure to various levels of the industry. A scaling back of subsidies or outright elimination could have a negative impact on everything from exploration and production ETFs to oil equipment and services funds.
Disclosure: No positions at time of writing.
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