‘Decision 2012’ Through An ETF Lens

November 02, 2012


The core concern is that investors would be wise to take a capital gains tax hit now before rates head higher. The ETF piece comes into focus because they are so much cheaper to own than mutual funds and, moreover, because most are index funds, they are more tax efficient than actively managed mutual funds they’d displace.

“This is good for ETFs,” Colas said. “People are getting out of mutual funds they’ve been in for years, but they want to keep their allocation the same, so they are switching into ETFs.”

Year-to-date, inflows into U.S.-listed ETFs has already surpassed the total inflows for all of 2011, while outflows from equities mutual funds, for instance, have been growing.

“We know those tax rates are unsustainable, so we are going to see mutual fund outflows and ETF inflows accelerate between now and the end of the year,” Colas said.

Sector Differences

On a more granular note, the outcome of the election could have varying impacts on different economic sectors—and on those ETFs tapping into those sectors.

In a note published earlier this year, S&P Capital IQ Analyst Todd Rosenbluth noted that an Obama win would most likely be beneficial for health care and pharmaceutical companies, as they continue to implement Obamacare.

Rosenbluth is also bullish on telecommunication names under an Obama administration, thanks to the government’s support and subsidies geared for broadband expansion.

ETFs such as the Healthcare Select Sector SPDR (NYSEArca: XLV) and the Vanguard Telecommunications Services ETF (NYSEArca: VOX) would be sitting in the middle of that action, he said in a S&P MarketScope Advisor in September.

A Romney win wouldn’t derail the policies that are currently in place that impact those two sectors, but it could also bring benefits to a slew of other economic sectors such as financials, transportation stocks and coal.

A Romney administration would likely mean turnover of heads in many regulatory agencies, particularly those impacting the financial sector.

“S&P Capital IQ believes that the [Dodd-Frank] legislation created a lot of leeway, allowing less stringent provisions,” Rosenbluth said in the note. “Fair Lending and the Community Reinvestment Act are major initiatives of the current Department of Justice, and we think there would be less pressure on the banking industry from a Romney administration.”

Financial-focused ETFs abound, but Rosenbluth pointed out the iShares S&P Global Financials Sector Index Fund (NYSEArca: IXG) as one of the funds that stand to gain from a Romney win.

“The current administration has worked against the coal industry and coal-fired plants, by adding regulation,” Rosenbluth added in the note, pointing out what coal—and transportation companies—stand to gain from an Obama defeat.

“Coal accounts for 25 percent of total railroad revenues, and our analysts think that the rails would benefit from further encouragement of drilling in shale regions since they transport much of the needed pipe and sand along with outbound oil products,” he said.

But at the end of the day, ETF investors could win and lose no matter who takes office in 2013. “This is largely a zero-sum game, as one industry or sector that could benefit from an Obama re-election could be hurt by a Romney victory,” Rosenbluth said.


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