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Trump Proposes 2020 Budget: ETFs to Top & Flop

Sweta Killa

President Donald Trump unveiled his third budget proposal for fiscal 2020, which begins on Oct 1,  2019. The record $4.75 trillion budget proposal seeks to bolster funding for defense and border walls while cutting down on social and domestic programs like education and environmental protection. The large reduction of $1.1 trillion will come from lower spending on discretionary domestic programs, outside of the military, over the course of a decade.

This draft budget, called “A Budget for a Better America,” has more reductions in spending than any president in history has ever proposed, underscoring concern about the national debt. Notably, the deficit has amplified under Republican leadership because of the tax cuts enacted last year. The proposal aims significant economic growth over the next decade say at about 3% annually, with the expectation that the government will continue to enact tax cuts and a deregulatory agenda.

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

Defense Spending Boost

Trump has proposed a 5% or $34 million increase in defense spending to a total of $750 billion, up from $716 billion. The blueprint also aims to increase spending in Veterans Affairs and Homeland Security.

The draft plan comes across as a boon for the aerospace sector, which currently belongs to a top-ranked Zacks industry (in the top 13%). Defense ETFs – PowerShares Aerospace & Defense Portfolio PPA, iShares U.S. Aerospace & Defense ETF ITA and SPDR S&P Aerospace & Defense ETF XAR are thus expected to surge. PPA has a Zacks ETF Rank #3 (Hold) while ITA and XAR have a Zacks ETF Rank #2 (Buy) (read: Why Aerospace & Defense ETFs are Soaring in 2019).

Boost for Mexico Border Wall

Trump’s blueprint outlines $8.6 billion for the border wall between the U.S. and Mexico - more than six times received in each of the past two fiscal years. This will hurt iShares MSCI Mexico Capped ETF EWW, which offers a diversified exposure to Mexican stocks. The fund has a Zacks ETF Rank #3.

Historic Spending Cuts

The government agencies that will see drastic cuts in their spending, including 31% in Environmental Protection Agency (EPA), 23% in the State Department, 22% in the Transportation Department, 16% in Housing and Urban Development, 15% in the Interior Department, and 12% in the Health and Human Services Department (read: Homebuilder ETFs Shining Ahead of Spring Selling Season).

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 and VanEck Vectors Agribusiness ETF MOO. QCLN has a Zacks ETF Rank #3.

Additionally, the Trump administration has requested for deep spending cuts at many federal science agencies, including a 13% cut for the National Institutes of Health (NIH) and a 12% cut for the National Science Foundation (NSF) for the third year in a row. The reduction is expected to hurt several ETFs from the healthcare sector such as The Loncar Cancer Immunotherapy ETF CNCR, Principal Healthcare Innovators Index ETF BTEC, VanEck Vectors Generic Drugs ETF GNRX, iShares Evolved U.S. Innovative Healthcare ETF IEIH and Virtus LifeSci Biotech Clinical Trials ETF BBC. BTEC and BBC have a Zacks ETF Rank #2.

Reduction in Discretionary Programs for Poor

The proposed budget is detrimental to the poor and the disabled. It includes reduction over the next decade of $1.5 trillion in Medicaid and $845 billion in Medicare; $25 billion in Social Security, including cuts for disability insurance; $220 billion in Supplemental Nutrition Assistance Program (commonly known as food stamps); a $21 billion cut in Temporary Assistance for Needy Families program (commonly known as welfare) and $207 billion in the student loan program.

Consumer Staples Select Sector SPDR Fund XLP could be in trouble if food and nutritional assistance funding is slashed as the ETF offers exposure to essential products across America. XLP has a Zacks ETF Rank #1. 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, will also be hit hard.

Elimination of EV Tax Credit

The Trump administration also proposed to eliminate a tax credit worth up to $7,500 on the purchase of new electric vehicles, a move it says will save the U.S. government $2.5 billion over a decade. However, it will likely take a toll on automakers. First Trust NASDAQ Global Auto ETF CARZ, offering pure play global exposure to auto stocks, will be on investors’ radar. The fund has a Zacks ETF Rank #3 (read: 10 ETF Areas to Gain as Trump Delays Additional Tariffs).

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