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ETFs to Top/Flop as Trump Lays Foundation for Future America

Sweta Killa

President Donald Trump unveiled his first budget proposal for fiscal 2018. The $4.1 trillion budget titled A New Foundation for American Greatness seeks to eliminate fiscal deficit over the next decade. In order to accomplish this, the budget calls for $3.6 trillion in spending reductions and a boost to military spending over 10 years.

The budget is also aimed at balancing and reducing publicly held debt from 77% of GDP in 2018 to 60% of GDP, the lowest level since 2010, by the end of the 10-year budget window. The plan would swing from a deficit of $440 billion in 2018 to a surplus of $16 billion in 2027, for the first time since 2001. Trump expects the budget to lead to accelerated GDP growth of 3% from the current 1.9% (read: Likely ETF Winners and Losers from Trump Policies).

Here are the key takeaways from the budget and their expected impact on ETFs:

Deep Spending Cuts

The government agencies that will see drastic cuts in their spending, including 31% in Environmental Protection Agency (EPA), 29% in the State Department, 21% in Agriculture Department, 20% in Labor, 16% each in U.S. Army Corps of Engineers, Commerce, and Health and Human Services, 14% in Education, 13% in Housing and Urban Development, and Transportation, and 11% each in Interior and National Science Foundation. Other agencies like Treasury, NASA, DOJ Justice, and Small Business Administration will see a slight reduction in the range of 1% to 5% (read: Trump Unveils First Budget Blueprint: ETFs to Gain or Lose).

The reductions will likely impact ETFs covering various corners of the space. Notable among these may be First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN, PowerShares WilderHill Clean Energy Portfolio PBW, PowerShares DB Agriculture Fund DBA, and VanEck Vectors Agribusiness ETF MOO. QCLN has a Zacks ETF Rank of 3 or Hold rating while DBA has a Zacks ETF Rank of 5 or Strong Sell rating.

The budget is expected to hurt The Loncar Cancer Immunotherapy ETF CNCR, having a Zacks ETF Rank of 3, as the National Cancer Institute would be hit with a $1 billion spending cut. Overall, the Trump administration would reduce the National Institutes of Health budget from $31.8 billion to $26 billion. As such, Health Care Select Sector SPDR Fund XLV having a Zacks ETF Rank of 1 or Strong Buy rating will be in focus (read: Trump Wins Healthcare Vote: ETFs to Watch).

Defense Spending Boost

Trump has proposed a 10% or $54 billion increase in defense spending to ramp up America’s fight against ISIS, improve troop readiness, and build more jets, ships and military technology. This represents the largest increase in national defense spending since President Ronald Reagan’s Pentagon buildup in the 1980s. Total spending for the Defense Department may now rise to $639 billion in fiscal 2018. The proposal also aims to increase 6% spending in Veterans Affairs and 7% in Homeland Security.

The plan should also prove to be a great boon to the aerospace sector, which currently has a solid Industry Rank in the top 19%. Defense ETFs – PowerShares Aerospace & Defense Portfolio PPA, iShares U.S. Aerospace & Defense ETF ITA and SPDR S&P Aerospace & Defense ETF XAR are thus widely expected to surge. These funds have a Zacks ETF Rank of 1 (read: Aerospace and Defense ETFs Soar on U.S-Saudi Deal).

New Infrastructure Spending

Keeping his campaign promise, Trump called for $1 trillion in private/public infrastructure investment over the next 10 years across a range of sectors, including surface transportation, airports, waterways, ports, drinking and wastewater, broadband and key Federal facilities. American Industrial Renaissance ETF AIRR, PowerShares Water Resources Portfolio PHO and iShares Dow Jones Transportation Average Fund IYT should obviously make hay. AIRR has a Zacks ETF Rank of 2 or Buy rating while IYT has a Zacks ETF Rank of 4 or Sell rating.

Reduction in Discretionary Programs for Poor

The budget plan is detrimental to the poor and the disabled. It would slash Medicaid and the Children's Health Insurance Program by $616 billion, Supplemental Nutrition Assistance Program (commonly known as food stamps) by $192 billion, Temporary Assistance for Needy Families program (commonly known as welfare) by $22 billion and Social Security disability benefits by nearly $70 billion over the next decade.

Consumer Staples Select Sector SPDR Fund XLP could be in trouble if food and nutritional assistance funding are slashed as the ETF offers exposure to essential products across America. XLP has a Zacks ETF Rank of 3. Additionally, Barclays Return on Disability ETN RODI, providing exposure to companies that attract and hire people with disabilities along with their friends and family as customers and employees, would also be hit hard.

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SPDR-CONS STPL (XLP): ETF Research Reports
PWRSH-WATER RES (PHO): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
ISHARS-TRAN AVG (IYT): ETF Research Reports
LONCAR CANCER (CNCR): ETF Research Reports
PWRSH-W CL EGY (PBW): ETF Research Reports
ISHARS-US AEROS (ITA): ETF Research Reports
PWRSH-DB AGRIC (DBA): ETF Research Reports
NASDAQ-CL EDG G (QCLN): ETF Research Reports
FT-RBA AMER IND (AIRR): ETF Research Reports
SPDR-SP AER&DEF (XAR): ETF Research Reports
VANECK-AGRIBUS (MOO): ETF Research Reports
PWRSH-AERO&DEF (PPA): ETF Research Reports
BARCLY-RTRN DIS (RODI): ETF Research Reports
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