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ETF Plays for a Divided Midterm Elections

This article was originally published on ETFTrends.com.

With a contentious midterms election season coming up, many anticipate a split government that could potentially impact the way ETF investors ride the markets ahead.

Some expectations point to Democrats winning back the House of Representatives and the Republicans maintaining a narrow hold on the Senate - Republicans currently dominate both chambers. According to public opinion polls, it would require a sea change to alter current projections, CNBC reports.

"If the consensus expectation of a divided government turns out to be correct, the most likely political consequences would be an increase in investigations and uncertainty surrounding fiscal deadlines," David Kostin, Goldman's chief U.S. equity strategist, said in a note.

For example, the rise in government-backed investigations could lead to impeachment proceedings against President Donald Trump. Kostin pointed out that fiscal deadlines could also lead to government shutdown concerns, which previously overturned markets.

Consequently, investors who are seeking a hedge against further weakness in the markets may turn to alternative ETF strategies. For those who are wary of any potential pullbacks in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500.

For example, the ProShares Short S&P500 (SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (SDS) , which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (SPXS) , which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (SPXU) , which also takes the -300% daily performance of the S&P 500.

A divided Congress would also mean real immediate regulatory changes on price changes in the pharmaceutical industry. Investors have already been positioning for the outcome through pharma stocks and related ETFs, such as the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) , SPDR Pharmaceuticals ETF (XPH) and iShares U.S. Pharmaceuticals ETF (IHE) .

Aerospace and defense stocks could also benefit if Congress is unable to make up its mind over any major fiscal tightening. ETF investors can also tap into this market segment through sector-specific plays like the iShares U.S. Aerospace & Defense ETF (ITA) , PowerShares Aerospace & Defense Portfolio (PPA) and SPDR S&P Aerospace & Defense ETF (XAR) .

For more information on the market sectors, visit our sector ETFs category.

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