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Time for Momentum ETFs as Tax Cut Odds Rise?

Sanghamitra Saha
Is (HRS) Outperforming Other Computer and Technology Stocks This Year?

The market is abuzz with talks that the Trump administration is silently proceeding with the tax cut plan. Last week, “corporate CEOs abandoned him, quitting his advisory councils and there was speculation respected aides and Cabinet members would leave him,” as per an article published on CNBC.

This confusion raised chances of materialization of the proposed tax cut plan as Republicans apprehend losing the 2018 election (read: Politics & Geopolitics Loom: Short S&P 500 with These ETFs).

As per the original tax overhaul plan, Trump has suggested a 15% corporate tax rate compared with the present 35%. The administration has proposed three tax brackets with rates of 35%, 25%, and 10%, down from the current seven brackets, “double the standard deduction that Americans can claim on their tax returns and [a] repeal [of] the estate tax and alternative minimum tax” (read: 5 ETFs to Buy if Trump Tax Reform is Enacted by Year End).

Analysts now expect a modified tax cut plan to be enacted instead of a full-fledged tax overhaul scheme. According to a Citigroup analyst, as quoted at CNBC.com, instead of a corporate tax rate in the range of 15 or 20% as proposed by the President and House Republicans, the rate might be around 25%, from 35% at present.

The S&P 500 company now has about a 27% tax rate on average, which is slightly higher than the reduced possibility. Still, the move itself would be viewed as an achievement of republicans. Treasury Secretary Steven Mnuchin, recently said tax legislation is "the President’s highest focus." Overall, prospects of a reduction in the tax burden on American corporate houses would be well-received by investors.

How About Momentum Plays?

If the prospect of tax cuts go up further, equity investors can definitely cash in on the trend via momentum investing because stocks will likely then shoot up. Momentum investing looks to reflect profits from buying stocks that are sizzling on the market.

Below we highlight four momentum ETFs which may find a place on investors’ wish list.

iShares MSCI USA Momentum Factor ETF MTUM

This ETF seeks to track the performance of large- and mid-cap U.S. stocks exhibiting relatively higher momentum characteristics. IT and Financials hold the top two positions in the fund (read: Retail Sales Off to a Great Start to Q3: ETFs to Buy).

SPDR Russell 1000 Momentum Focus ETF ONEO

This product targets large cap securities with a combination of core factors (high value, high quality, and low size characteristics), with a focus factor comprising high momentum characteristics.

First Trust Dorsey Wright Focus 5 ETF FV

The underlying index of the fund – the Dorsey Wright Focus Five Index –  is designed to provide targeted exposure to the five First Trust sector and industry-based ETFs that DWA believes offer the greatest potential to outperform the other ETFs in the selection universe. First Trust Dow Jones Internet Index Fund (21.42%) and First Trust NASDAQ-100-Technology Sector Index Fund (20.48%) are the two top sectors of the fund.

PowerShares DWA Tactical Sector Rotation Portfolio DWTR

The underlying index of the fund — the Dorsey Wright Sector 4 Index — is designed to gain exposure to the strongest relative strength sectors in the U.S. through the universe of nine PowerShares DWA sector Momentum ETFs.

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FT-DORSEY WFFF (FV): ETF Research Reports
ISHRS-MSCI US M (MTUM): ETF Research Reports
PWRSH-DWA TSRP (DWTR): ETF Research Reports
SPDR-R1000 MF (ONEO): ETF Research Reports
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