Blue Wave to Hit America? Sector ETFs to Win or Lose

·4-min read

Chances are rising that the blue wave of Democrats will take control over the House and Senate in November. Democratic presidential candidate Joe Biden now has better chances of winning the November election, according to a national poll. President Trump presently has a 40% chance of winning the White House compared with about 50% in May.

Biden’s winning may mean a partial rollback of President Trump’s Tax Cuts and Jobs Act. Notably, President Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%.

Biden is also proposing to levy a minimum tax rate of 15%, a potentially damaging outcome for some major companies that pay little in taxes. His tax plan points at revenues needed to pay down the huge debt incurred to fight the recession.

The Tax Cuts and Jobs Act of 2017 has lowered the effective tax rate of S&P 500 companies by 8 percentage points to 19% and boosted S&P 500 earnings by 10%, according to Goldman’s Kostin. Now, Goldman Sachs estimates that a reversal would reduce 2021 S&P 500 earnings-per-share forecast by 12%. Credit Suisse estimates this change in taxes to boost the effective rate by 4% to 5%, and cut $9 off the estimated S&P 500 earnings per share.

Now, it all depends on which party rules the Senate. If there is a divided Congress, Biden may not be able to enact an outright tax cut. Moreover, if elected, Biden’s primary objective will be to take the economy out of the virus-led slowdown. So, policies that sound extremely harsh may not be implemented next year.

Yet, some specific corners stand to gain even if the United States gets a Democratic president. Against this backdrop, below we highlight a few sector ETFs that are likely to gain or lose amid a blue wave sweep.

Wining Sectors

Alternative Energy

The alternative energy space has always been supported by Democratic leaders. If Democrats rule the Congress and the White House again, the stocks and ETFs in the space will get a boost.  Biden is forming a plan – a Clean Energy Revolution – to address the issue of climate emergency. He sees America becoming a 100% clean energy economy and net-zero emissions no later than 2050. The move could further benefit ETFs like Invesco Solar ETF TAN and iShares Global Clean Energy ETF ICLN.

Consumer Staples

The federal minimum wage has remained at $7.25 an hour since 2009, although some states have higher minimums. House Democrats in July passed the Raise the Wage Act, which would phase it up to $15 by 2025, but the plan was dissolved in the Senate as Republicans argued that higher minimum labor costs may lead to lower hiring of workers.

Whatever the case, Democrats’ demand shows that serious efforts to rev up minimum wage would be in the cards if there is a sweeping victory. This in turn may lead to greater buying power among consumers, which may end up benefiting consumer staples ETFs like Consumer Staples Select Sect. SPDR XLP.

Losing Sectors

Banks

Banks were a key beneficiary in the lower-tax environment. Big U.S. banks have enjoyed an average 13% increase in earnings per share from the lower rate, per Goldman Sachs. Banks also enjoyed easing of regulatory stringencies in recent years. Senetor Elizabeth Warren could be Treasury secretary under Biden. That would mean tougher regulation of banks, irrespective of which party controls the Senate, per Wall Street strategists. Meanwhile, the Fed capped dividends and put an embargo on share repurchases by the U.S. banks. SPDR S&P Regional Banking ETF KRE should be watched closely in the coming months, as tough times lie ahead.

Healthcare

Healthcare services was also one of the most-taxed industries before. According to MUFG Securities, tax reform has probably boosted managed care companies’ earnings by 30%. In the absence of this, SPDR S&P Health Care Services ETF XHS could lose ahead.

Reuters noted that domestically geared healthcare companies that were also winners of the tax reform may now feel the pressure. Invesco S&P SmallCap Health Care Portfolio PSCH) could thus be a loser. Moreover, pharma stocks have long been accused of price-gouging by some democrat leaders. However, stocks engaged in the COVID-19 vaccines and treatments may soar ahead.

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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
 
iShares Global Clean Energy ETF (ICLN): ETF Research Reports
 
Invesco Solar ETF (TAN): ETF Research Reports
 
Invesco SP SmallCap Health Care ETF (PSCH): ETF Research Reports
 
SPDR SP Health Care Services ETF (XHS): ETF Research Reports
 
SPDR SP Regional Banking ETF (KRE): ETF Research Reports
 
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