U.S. economy has been on rally mode since Donald Trump’s election victory. Trump’s tax reform was recently signed into law, increasing optimism among investors around a faster pace in economic growth and on the prospective passing of other policies of the Trump administration.
Economic Scenario and Tax Reform
United States’ GDP grew 2.6% in the fourth quarter compared with 3.2% in the previous quarter. Economists polled by Reuters had expected the economy to register a growth rate of 3% in the final three months of 2017. However, U.S. retail sales grew 4.2% in 2017 compared with 3.2% in 2016, showing signs of a strengthening economy (read: Amazing ETF Strategies for Skyrocketing Markets).
Moreover, Trump’s tax reform is expected to significantly benefit U.S. companies. Financials are expected to be among the major winners from the tax reform, as companies with a high effective tax rate are expected to have a significantly lower tax bill.
Large-cap companies will be able to repatriate a significant portion of overseas earnings at a lower tax rate. For the sake of argument, Apple Inc AAPL announced its plans of bringing most of the $252.3 billion offshore cash back to the United States, following Trump’s tax reform. The repatriation is expected to generate a one-time tax payment of $38 billion (read: Profit From Apple's Big Plans With These ETF).
Consumer Sentiment and Infrastructure
Coming to consumer sentiment, Conference Board's measure of consumer confidence increased to 125.4 in January compared with 122.1 in the prior month. It surpassed economists’ expectations of 123.1.
Per a CNBC article, citing a statement by Lynn Franco, Director of Economic Indicators at The Conference Board, "Expectations improved, though consumers were somewhat ambivalent about their income prospects over the coming months, perhaps the result of some uncertainty regarding the impact of the tax plan," adding, "Consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018".
Moving on to infrastructure, Trump addressed the need to rebuild America’s troubling infrastructure by a bipartisan agreement between the two parties. In his State of the Union Speech, Trump said, “I am asking both parties to come together to give us safe, fast, reliable and modern infrastructure that our economy needs and our people deserve. Tonight, I am calling on Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment that our country so desperately needs.”
Let us now discuss a few ETFs focused on providing exposure to the discussed sectors.
Financial Select Sector SPDR Fund XLF
This fund seeks to provide exposure to financial stocks in the U.S. equity markets.
It has AUM of $34.8 billion and charges a low fee of 14 basis points a year. From a sector look, the fund has high exposure to Banks, Capital Markets and Insurance sectors, with 44.6%, 20.7% and 17.9% exposure, respectively (as of Dec 31, 2017). The fund’s top three holdings are Berkshire Hathaway Inc Class B BRKB, JPMorgan Chase & Co JPM and Bank of America Corp BAC with 11.5%, 11.1% and 8.6% allocation, respectively (as of Jan 30, 2018). The fund has returned 28.5% in a year and 6.3% year to date. XLF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares US Consumer Services ETF IYC
This ETF is a relatively costly bet on the U.S. consumer sector.
It has AUM of $862.7 million and charges a fee of 44 basis points a year. From a sector look, Retailing, Media and Consumer Services take the top three spots, with 42.5%, 20.7% and 16.1% allocation, respectively (as of Jan 29, 2018). From an individual holdings perspective, the fund has high exposure to Amazon.Com Inc AMZN, Home Depot Inc HD and Comcast A Corp CMCSA, with 15.3%, 6.4% and 4.6% allocation, respectively (as of Jan 29, 2018). The fund has returned 27.2% in a year and 9.5% year to date. IYC has a Zacks ETF Rank #2 with a Medium risk outlook.
Materials Select Sector SPDR Fund XLB
This fund seeks to provide exposure to materials stocks and tracks the Materials Select Sector Index.
It has AUM of $5.4 billion and charges a moderate fee of 14 basis points a year. From a sector look, the fund has high exposure to Chemicals, Containers & Packaging and Metals & Mining, with 72.4%, 12.9% and 10.0% exposure, respectively (as of Dec 31, 2017). The fund’s top three holdings are DowDuPont Inc. DWDP, Monsanto Co. MON and Praxair Inc PX with 23.3%, 7.6% and 6.5% allocation, respectively (as of Jan 30, 2018). The fund has returned 22.5% in a year and 3.9% year to date. XLB has a Zacks ETF Rank #2 with a Medium risk outlook.
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J P Morgan Chase & Co (JPM) : Free Stock Analysis Report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Home Depot, Inc. (The) (HD) : Free Stock Analysis Report
Comcast Corporation (CMCSA) : Free Stock Analysis Report
Praxair, Inc. (PX) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
SPDR-FINL SELS (XLF): ETF Research Reports
SPDR-MATLS SELS (XLB): ETF Research Reports
ISHARS-US CN CY (IYC): ETF Research Reports
Monsanto Company (MON) : Free Stock Analysis Report
Dow Chemical Company (The) (DWDP) : Free Stock Analysis Report
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