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ETF Ideas for Post-Election Gridlock

This article was originally published on ETFTrends.com.

The 2018 mid-term elections will be held on Nov. 6 and many market observers are bracing for a power divide between the executive and legislative branches.

Polls indicate it is likely Democrats will gain control of the House of Representatives for the first time since 2010, which could affect various sectors and investment themes.

“Any change in congressional power could impact tax reform and spending as well as sectors of our economy from health care and defense to infrastructure and energy,” said State Street Global Advisors (SSgA) in a recent note. “And while having one party control both houses of Congress would make distinct policy actions more probable, a split Congress, with the House of Representatives going blue with Democrats and the Senate remaining red with Republicans would likely mean greater gridlock. In that case, in addition to fewer laws being passed, key issues would become bargaining chips to make deals at the 11th hour, all the while fraying investors’ nerves.”

Defensive exchange traded funds, including the SPDR MSCI Quality Mix USA ETF (QUS) and the SPDR S&P Dividend ETF (SDY) could be solid ideas in a more contentious political environment.

Exploring The Ideas

QUS, which is three and a half years old, tracks the equally-weighted MSCI USA Quality Mix A-Series Index, which is a combination of the MSCI USA Value Weighted, MSCI USA Minimum Volatility and MSCI USA Quality Indexes.

Related: ETF Strategies to Address the Hidden Risks of Market-Cap Weighting

Bolstering the case for quality investing, those other metrics include high returns on equity, stable dividend growth, robust cash flow, lack of financial leverage, sturdy balance sheets and strong management, notes MSCI.

“If we do see a split Congress and the gridlock barometer runs high, consider positioning portfolios a bit more defensively,” said SSgA. “This doesn’t mean going all to cash, but remaining invested with a defensive tilt in equities and overlaying tail risk positions from an asset allocation perspective. After all, US economic growth remains positive and US company profits are likely to grow above 20% for this quarter, the third quarter in a row.”

SDY holds firms that have a minimum dividend increase streak of 20 years. Moreover, SDY follows a yield-weighting methodology that allocates a larger weight toward those with higher yields, so the portfolio leans toward more mid-sized companies. While SDY mandates member firms have dividend increase streaks of at least 20 years, many of its 100-plus holdings have longer payout increase streaks than that.

For more information on the smart beta strategy, visit our smart beta category.

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