Midterms Produce Split Congress: ETF Areas In Focus

As expected, U.S. midterm elections produced a divided congress with Democrats taking control of the House and Republicans maintaining its hold over the Senate. Now, a likely battle over the government’s borrowing authority may make the passage of any legislative deal complicated. Below we highlight some of the areas that may see changes ahead (read: Trump's Presidential 2 Years: Must-See ETF Areas).

Changes in Tax Reform?

Republicans seek to push the Tax Cuts and American Jobs Act of 2017 further and promised middle class tax cuts. Democrats were against the 2017 tax reform bill. The President now wants Democrats to work on the tax reform idea which results in a cut in taxes for the middle class even if it means hiking the corporate tax rate – which is now 21%.

But Democrats are doubtful if “adjustment would provide sufficient relief to the middle class,” per an article published on CNN.com. They are concerned about ballooning deficit and adding trillions to the national debt. So, they can try to undo it. Moreover, currently more than half of the Americans believe that cuts were not helpful in the 2017 taxes people filed in April, though 2018 filings could bring in some of the benefits, per Bloomberg.

The Tax Policy Center projects that 91% of filers in the middle segment will benefit from the tax cut. After 2018, most Americans will continue to benefit until the end of 2025. By 2027, the Tax Policy Center expects 53% of the population to end up paying higher taxes, per Bloomberg.

So, in a divided congress, depth and width of tax cuts could be lessened. As a result, interest rates take a dive and in turn boost dividend ETFs, per SPDR. So, Vanguard Dividend Appreciation ETF (AX:VIG) and iShares Select Dividend ETF DVY could be in focus. On the other hand, consumer ETFs like iShares US Consumer Services ETF IYC can also be tracked as its performance can vary depending on consumers’ realization of the benefits of the tax cut (read: GOP Nears Tax Reform: Buy These ETFs).

NAFTA on High Alert

Trump and his Canadian and Mexican counterparts are yet to sign the revised NAFTA agreement -- known as the US-Mexico-Canada Agreement, or USMCA -- in late November. But Congress is yet to approve the agreement and might not vote on it until the end of the year unless majorities in both chambers are ready to “alter the requirements laid out by the fast-track authority that applies to trade deals,” per CNN.com. This puts iShares MSCI Mexico Capped ETF EWW and iShares MSCI Canada ETF (AX:EWC) in focus (read: U.S.-Mexico Trade Deal to Revamp NAFTA: ETF Winners).

China’s Problem Will Likely Remain

President Trump’s trade war with China has been at the forefront all through this year. But China’s problem will probably not lessen even with the Democrats reoccupying the House. The Democrats too broadly agree that the United States should take a stricter stance against China on various fronts.

So, China ETFs like iShares China Large-Cap ETFiShares China Large-Cap ETF (TE:FXI) continue to be at a critical juncture. Investors should note that unlike Trump, Democrats’ policy against China could be relatively soft. Trade-sensitive ETFs like SPDR Dow Jones Industrial Average (NYSE:DIA) ETF (V:DIA) and Industrial Select Sector SPDR ETF (NYSE:XLI) XLI should also be noticed.

Healthcare: One of the Sensitive Areas

Healthcare is likely to be one of the most-sensitive areas. Debates on drug pricing issues will come at the forefront. Trump’s announcement of the drug plans in May was in the best interest of pharma companies. Drug plans put pressure on U.S. trading partners, forcing them to pay more for medicines.

But Democrats have been voicing against high drug prices for long. So, pharma ETFs like SPDR S&P Pharmaceuticals ETF (HN:XPH) may see trouble ahead, in case of Democrats’ overpower (read: Pharma & Biotech ETFs Soar on Trump's Drug Plan).

On the other hand, with Democrats taking the House, measures for healthcare availability and benefit to hospitals will come in the forefront, benefiting SPDR S&P Health Care Services (NYSE:XHS) ETF XHS, per SPDR (read: 4 Sector ETFs Braved Trade Turmoil in Q2).

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