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ETF Focus: What’s the worst Trump trade? Betting on Trump policies

June 19, 2017
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The stock market continues to extend the rally that followed Donald Trump’s November presidential election victory, but investors who bet on the supposed “Trump trades” largely look worse for wear.

Companies and sectors supported by the president—based on proposed legislation or his speaking in favor of them—have underperformed the broader market in 2017. While some of these groups popped in the immediate aftermath of his unexpected victory, they have since retreated, while the market’s current leaders are instead the groups he has ignored or spoken out against.

“There was a lot of noise following the election, a lot of assumptions on how legislation would impact various sectors. For the most part, we’ve seen those moves completely reverse at this point,” said Charlie Bilello, director of research at Pension Partners LLC.

Bilello cited Mexico as an example. The largest exchange-traded fund to track the Mexican equity market—the iShares MSCI Mexico Capped ETF












EWW, -0.50%










—plummeted on Trump’s victory, posting its biggest one-day decline since 2008 as investors bet that Trump’s policies on trade and immigration would prove to be serious headwinds for the nation’s growth. Thus far in 2017, however, as none of those policies have come to fruition, the ETF is up nearly 23%, more than twice the 9.4% rise of the S&P 500












SPX, +0.83%

A similar theme can be seen in the iShares MSCI Russia Capped ETF












ERUS, +0.56%










which tracks an index of Russian stocks. The fund spiked to a two-year high following the election, in large part due to the perception that Trump’s victory was favorable to the country. In 2017, however, the fund has slumped 15%.

“After the election, these were all these extreme headlines about the dangers for Mexico, but if you had traded on that narrative, it would have been the wrong move,” Bilello said. “We have seen a lot of themes get reversed since the election. The market can be wrong, and this is a point that people miss in the short term, and get very wrong when they get emotional about narratives and start extrapolating.”

Among specific industries, initial postelection moves came on the theory that Trump, a Republican, would be able to work with the Republican-led House and Senate to quickly pass a variety of bills expected to accelerate growth and stoke corporate profits. However, these trades have turned as his administration has had few legislative accomplishments thus far, particularly when it comes to economic policy. Other industries are seen as needing more than a high-profile supporter to offset larger market trends.

In the case of pharmaceutical companies and biotech stocks, investors—who once sold the groups after Trump talked about wanting to bring drug prices lower—have stopped believing threats from the Oval Office. Now, the health care sector is up nearly 14% on the year, a gain that’s secondly only to technology stocks among sector gainers.

Perhaps the most distinct example of this issue is related to the environment. Trump has said his administration is “putting an end to the war on coal” and withdrew the U.S. from the Paris climate accord. Thus far this year, the VanEck Vectors Coal ETF












KOL, +0.47%










—the most popular way for investors to get broad exposure to the sector—is up about 4.6% this year. That return lags behind both the broader market and funds dedicated to environmentally friendly companies. The iShares MSCI ACWI Low Carbon Target ETF












CRBN, +0.85%










for example, is up 13% this year.

Read:Trump’s Paris climate-accord stance may drive investors to environmental ETFs

“The private sector is just more important than regulation when it comes to coal,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, noting how the economy was transitioning to other forms of energy—including natural gas and “green” energies like wind and solar—that are not only seen as cleaner, but also competitive on price. “Coal won’t be the fuel source of the future even if the regulatory picture changes,” he said.

Some Trump trades have performed better. While an expected infrastructure spending package has taken a back seat to health care reform, still unpassed, most analysts view this as a bipartisan issue that has a higher chance of being passed. An infrastructure-themed ETF, the iShares Global Infrastructure ETF












IGF, +0.00%










is up 16% thus far this year.

Separately, the financial sector—one of the biggest gainers in the immediate aftermath of Trump’s victory—has lagged behind this year, though it has shown some signs of regaining momentum. Recently, the House of Representatives passed a bill to roll back the Dodd-Frank law, which could suggest that some of the industry deregulation investors initially hoped for could be on the way. The Financial Select Sector SPDR ETF












XLF, +1.03%










 is up 5.5% in 2017.

Related:Bets on regulatory relief for Wall Street banks are not going to pay off: analysts

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