ETFs To Watch As Trump Races Closer To Clinton

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Includes: CRBN, DBO, EWW, FAN, FXR, FXU, IAI, IYC, KBWB, KOL, PBW, PSCU, TAN, UNG, USO, VIS, XLF, XLV, XOP
by: Zacks Funds

As the prime election day is drawing closer, the gap between Republican and Democrat presidential candidates is narrowing, though Clinton is still ahead. As per Real Clear Politics poll average, the lead of Clinton over Trump shrank from 19.6 points (on July 2, 2015) to just 2.8 points on July 20, 2016.

Though throughout the campaign period Clinton has mostly maintained a strong lead, recently Trump is all over with his popularity picking pace. Against such a scenario, Trump's economic and political agenda, and its impact on the investing world deserve a look.

Tax Cut into the Play?

Donald Trump is a believer of tax cuts and plans to bring the top individual tax rate down to 25% from 39.6%, abolish the estate tax, slash 'the corporate tax rate to 15% from 35% and tax business profits of high-income households at a lower rate than their wages', as per Wall Street Journal. However, he noted that despite such widespread cuts, the economy will not face higher budget deficits.

On the corporate level, a notable impact would be felt on the tax inversion deals. U.S. companies often resort to the cross-border merger route to shift headquarters to a foreign base and avoid higher U.S. taxes. Notably, such deals have been rampant in the healthcare sector.

With a cut in the tax rate, companies may not have to rush to tax havens. This might benefit healthcare companies and related ETFs like the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) to some extent.

On the other hand, Trump is a believer of the fact that medicare could save as much as $300 billion annually through negotiation with drugmakers. This may turn negative for the healthcare sector.

On a different note, tax cuts would invariably boost consumer spending thus pushing up consumer stocks and the related ETFs like the iShares U.S. Consumer Services ETF (NYSEARCA:IYC). Income earners who are into the top tax bracket will especially be blessed. Since stock markets in most cases are being accessed by the high-income population, this extra cash received from tax will likely boost stock market activity further.

Infrastructure to Get a Boost

Donald Trump is also in favor of beefing up the infrastructure sector by working on roads, bridges, water systems and the power grid. He has a plan to shell out a trillion dollars on this.

Needless to mention, infrastructure and utilities ETFs should get a boost, if the plan ever materializes. Utilities ETFs like the First Trust Utilities AlphaDEX ETF (NYSEARCA:FXU) and the PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ:PSCU) are likely to benefit from this trend.

Break-Up of Big Banks

The latest surprise from the Republican platform is to pitch for reinstating the Glass-Steagall Act. The act, which showed up after the 1929 stock market crash, made investment and commercial banking two different segments. This step was taken because it was believed that commercial banks' excessive stock market investments led to the market crash and the subsequent Great Depression.

The rule was dropped during the Clinton administration, but Trump seeks to revive it to create a wall between big banks' businesses and "try and avoid some of the crisis that led to 2008," as per an article published in CNBC. Needless to say, financial ETFs like the Financial Select Sector SPDR ETF (NYSEARCA:XLF), the iShares U.S. Broker-Dealers ETF (NYSEARCA:IAI), and the PowerShares KBW Bank Portfolio ETF (NYSEARCA:KBWB)will come under pressure if Trump makes it to the White House.

To Encourage Fossil Fuels

Taking a completely different stance than president Obama, Trump is ready to push for more fossil fuel generation. Be it crude oil, natural gas or coal, Trump is to help it all. This in turn may hit low carbon and clean ETFs like the iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA:CRBN), the PowerShares WilderHill Clean Energy Portfolio ETF (NYSEARCA:PBW), the Guggenheim Solar ETF (NYSEARCA:TAN) and the First Trust ISE Global Wind Energy Index ETF (NYSEARCA:FAN).

Though Trump indicated that he will take a dovish stance on other energy sources, including nuclear, wind and solar, he still said that "solar and wind still required subsidies or had payoff periods too long to be attractive."

So, coal ETF VanEck Vectors Coal ETF (NYSEARCA:KOL)and energy exploration ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) should see some surge from this move.

Also, since Trump is planning to lift limits on energy production and drill oil at the country's full potential, oil prices - which are already suffering from higher global output and are finally on the verge of a turnaround - may slip again. Oil ETFs, including United States Oil ETF (NYSEARCA:USO)and PowerShares DB Oil ETF (NYSEARCA:DBO),are likely to feel the pinch.

Idea of Mexico Wall

Trump vows to make Mexico pay for a wall along the border as a part of his immigration plan. If this concept of Trump Wall turns into a reality, it might hamper booming U.S. exports of its natural gas surpluses to Mexico. This suggested move puts the spotlight on the iShares MSCI Mexico Capped ETF (NYSEARCA:EWW)while natural gas ETFs like the United States Natural Gas ETF (NYSEARCA:UNG) also draw attention.

35% Tax on Products Built Outside US

With Trump urging U.S. companies to shift their manufacturing plants back home by imposing a 35% import tax, a trend of 'offshoring' will eventually fade out and a trend of 'reshoring' will be seen. With this, industrial ETFs like the Vanguard Industrials ETF (NYSEARCA:VIS) and the First Trust Industrials AlphaDEX ETF (NYSEARCA:FXR) may gain traction.

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