Energy? Defense? Trump vs. Biden Sharpens ETF Options

Energy? Defense? Trump vs. Biden Sharpens ETF Options

Candidates' agendas shape investors choices during election season.

Reviewed by: Ron Day
Edited by: Staff


Sector ETFs are a powerful tool for fund selectors looking to add alpha to portfolios while mitigating the idiosyncratic risks of stock selection. Never is this more prevalent than during U.S. elections when performance dispersion between sectors increases dramatically. 

According to research conducted by S&P Dow Jones Indices (SPDJI), cross-sector effects have been above average in 75% of U.S. presidential election months since 1989. This highlights the importance of sector selection during presidential elections, especially when the two candidates have very different policies. 

“The importance of sectors tends to be greater than average during the Novembers when U.S. federal (and especially presidential) elections take place,” SPDJI’s research said. “Sector allocation decisions can add (or subtract) greater value in these months.” 

For example, financials have only underperformed once in the second half of a presidential election year—the Global Financial Crisis in 2008—while defensive sectors tend to underperform, research from RBC Capital Markets shows. This year, the two candidates—President Joe Biden and Republican candidate Donald Trump—both know what it takes to win a presidential election, however, the outcome remains uncertain for markets.

Biden Victory May Help Clean Energy Stocks

Biden’s focus on clean energy was one of the key themes throughout his presidency as highlighted by The Inflation Reduction Act, which passed in July 2022 and pledged $374 billion invested into climate and energy spending. His victory in 2020 gave an extra 
boost to the clean energy sector which was already on route to posting a record year. Highlighting this, the S&P Global Clean Energy Index nearly tripled over the 12 months as investors looked to capture the shift to a greener economy.

“With that, Biden most likely means that he wants to be viewed as the one that drives new forms of energy, increased international collaboration and drives modern solutions for a modern US,” Peter Garnry, head of Saxo Strats at Saxo Bank, said.

A Biden victory would create another positive environment for this theme, especially when contrasted with Trump’s 
anti-ESG stance as highlighted by his withdrawal from the Paris Agreement during his previous term in office.

At the other end of the spectrum, the traditional energy sector will likely be more buoyed by a Trump victory, given 
Biden’s focus on shifting the US to more renewable solutions. The $2.44 billion iShares Global Clean Energy ETF (ICLN) has dropped 21% over the past year.

Trump Victory May Boost Small Caps

Trump’s previous term in office was one defined by corporate tax cuts which boosted US equities across the board and 
the finance sector, in particular. However, the country’s skyrocketing debt levels leaves Trump with little room for these types of policies, according to Garnry.

“With US public debt growing faster than nominal GDP the room for Trump to engage in supply side economics, including cutting taxes, is no longer available,” Garnry added. “Trump’s policies from 2016-2020 cannot be carried out without severely risking the trust in US dollar and the long run fiscal sustainability of the US economy.”

As a result, his ‘America first’ rhetoric could be even stronger this time around, having been a constant focal point of his two presidential campaigns. This will benefit US small caps that do not generate the majority of their revenues from overseas, a potential boon if Trump wins this year. Finally, Trump’s rhetoric on defence spending across European nations has piled pressure on the likes of Germany and France to increase their military spending to 2% of GDP, in line with NATO-member expectations.

This, combined with the threat to withdraw from NATO, has created an attractive environment for defence ETFs which can act as a tool to protect against rising geopolitical risks.

The biggest small cap fund, the $78.4 billion iShares Core S&P Small-Cap ETF (IJR), has gained 8.3% this past year while the large defense fund, the $6.4 billion iShares U.S. Aerospace & Defense ETF (ITA), added 20%.

Wait and See

While many fund selectors position portfolios for the long term and will therefore avoid the noise surrounding the US presidential election, history shows there are opportunities in sectors at a time when there is little to be bullish about.

“We will have to wait and see which narratives emerge in the 2024 US presidential election, but history points to sector effects playing an elevated role, amplifying the importance of sector choices,” Hamish Preston, global head of US equities at SPDJI, concluded. 

This article originally appeared in a special section published by sister publication ETF Stream.

Tom Eckett is the editor of ETF Stream, joining as a senior writer in March 2019. He started his career at Investment Week in August 2016 as an asset management correspondent covering ETFs.