Top ETF Picks Now That Trump Is President

Political change is in the air, as President Donald Trump took office this month. His administration, elected on a platform of change, is expected to shake things up, and markets will react accordingly.

To ETF strategists making crucial asset allocation decisions, a new administration means re-evaluating some sectors, styles and country exposures. Here, seven of them tell us what ETFs or segments they are buying into now that Trump is in office, and why.

Dave Garff, president; Accuvest Investors – Walnut Creek, California

As basic as it sounds, we are looking at the big banks (choosing ETFs like the PowerShares KBW Bank Portfolio (KBWB) as an example, as opposed to the Financial Select Sector SPDR Fund (XLF)) as beneficiaries of decreased regulation from a Trump presidency. We obviously have to be patient, and wait for an opportunity to buy them when they are a little weaker in price.

Ben Doty, senior investment director; Koss Olinger – Gainesville, Florida

As contrarian investors, the relative opportunity in the U.S. is health care as a sector. It not only had negative returns last year, but had negative outflows. All the negative news about Republicans dismantling the Affordable Care Act and Trump’s comments on drug prices have depressed the sector and created uncertainty.

Yet at a trailing P/E of 15.5—possibly the lowest among all S&P sectors—and the third-highest earnings- per-share increases over the next three to five years, a lot of people are ignoring fundamentals. If you’re a value investor, you can’t avoid health care. The pharmaceutical subsector is trading under a P/E of 12.

[The chart below shows the one-year performance of Health Care Select Sector SPDR Fund (XLV) as an example in a segment populated by some 50 ETFs.]

Gary Stringer, president & chief investment officer; Stringer Asset Management – Memphis, Tennessee

We made two purchases largely as a result of the Trump presidency. In our balanced allocations, we bought high-yield municipal bonds—ETFs like the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB).

These bonds sold off hard on rising long-term interest rates and the idea that lower taxes would make municipal bonds less attractive. We think the sell-off was overdone, because we expect long-term interest rates to be range-bound from here, thus reducing interest rate risk, and that wealthy people will continue to look for tax-advantage investments, keeping demand for municipal bonds solid.

In addition, we hedged about one-third of our foreign currency risk. Trump has talked openly about improving job creation and economic growth through fiscal stimulus. Given that the economy is close to full employment, improvements in labor market conditions will likely lead to higher wages, increased inflation expectations and more Fed policy tightening.

We think this will lead to short-term interest rates rising and the U.S. dollar strengthening as foreign central banks remain more accommodative. While we do not expect the U.S. dollar to rise as swiftly as it did two years ago, we think it makes sense to reduce that risk for our investors. We like ETFs like the WisdomTree Japan Hedged Equity Fund (DXJ) and the iShares Currency Hedged MSCI EAFE ETF (HEFA). 

Ben Lavine, chief investment officer; 3D Asset Management – East Hartford, Connecticut

We believe investors should get more exposure to fixed-income ETFs investing in floating-rate debt tied to the three-month London interbank offered rate (Libor). The three-month Libor started trending higher well before the November election, and right around the time the SEC proposed money market reforms, which place tighter restrictions on portfolio holdings while enhancing liquidity and quality requirements.

This precludes money market funds from holding nongovernment-issued or insured short-term debt such as corporate commercial paper. The reforms have led to higher interest costs for nongovernment borrowers.

Floating-rate debt should perform better in a rising rate environment, particularly senior bank loans issued. However, below-investment-grade-loans credit spreads have narrowed considerably and are now below their long-term historical averages.

Investors may want to opt for more defensive floating-rate exposure in investment-grade and government securities. Two straightforward ETFs to consider are the iShares Floating Rate Bond ETF (FLOT) and the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN). Both are cheap, at 0.15-0.20%, and provide a yield just above current three-month Libor (currently at around 1%) with “A” average credit quality. 

Scott Kubie, chief strategist; CLS Investments – Omaha, Nebraska

The election of Donald Trump and stronger nationalist tendencies globally indicate an underlying shift in the emphasis of consumers and government policy. We expect greater consumer optimism, expansionary fiscal policies and regulatory reform to boost GDP growth. All three of these trends should boost value stocks relative to growth stocks.

Consumption will rise, infrastructure projects will increase demand for physical goods, and a more favorable regulatory environment benefits energy and materials stocks. All of those trends should boost interest rates and loan demand, supporting financials as well.

Prior to 2016, value had lagged growth in six of the previous nine years and had never outperformed by more than 2.3%. While value did well last year, we expect the trend to continue to favor value stocks over the intermediate term.

Two of our favorite domestic value ETFs are the iShares Edge MSCI USA Factor ETF (VLUE) and the Guggenheim S&P 500 Pure Value ETF (RPV).

Tyler Mordy, president & chief investment officer; Forstrong Global Asset Management – Toronto

Some sectors will be clear beneficiaries of the Trump regime. Banks, with decreased regulation, are particularly primed for outperformance. However, don’t count out less obvious candidates.

Chinese President Xi Jinping, who has worked diligently over the past three years to strengthen China’s position in Asia, likely views a Trump victory as his own triumph. Consider Obama’s “pivot to Asia,” with the Trans-Pacific Partnership being the centerpiece. It is now surely dead. That leaves China’s “Belt and Road” strategy as the uncontested blueprint for future economic integration in Asia.

Under that view, investors should continue to favor countries that are enlarging, not shrinking, their economic ecosystem. Asia, including China and India, are well-positioned to not only continue growing their middle classes but also to enhance regional trade linkages. Stay long these currencies and equity markets.

[The chart below shows the one-year performance of the iShares China Large-Cap ETF (FXI) and the iShares MSCI India ETF (INDA) as examples of ETFs that would tap into this theme.]

Clayton Fresk, Portfolio Manager; Stadion Money Management – Watkinsville, Georgia

We’re not making any specific trades in anticipation of what we think may happen. With so much uncertainty surrounding President Trump, it’s very difficult to forecast with any certainty what trades will or won’t work in the near future.

Rather, we’re continuing to monitor some existing themes such as small-cap outperformance (implemented via the iShares Russell 2000 ETF (IWM) and the iShares Core S&P Small Cap ETF (IJR)), and rising interest rates (implemented via the ProShares Short 20+ Year Treasury (TBF)) to see if those trends will continue or reverse.

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]