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Trump Set for Maiden Speech to Congress: ETFs in Focus

Sweta Killa

All eyes are currently on Trump’s first speech to Congress slated to be held later today where the President is expected to bring more clarity on promised tax cuts, big spending, and other business friendly policies. The address will provide Trump an opportunity to regain control and confidence of Americans after an eventful first five weeks in office.

‘Big’ Spending

Trump has pledged to make big infrastructure spending announcement during his speech to Congress. He has promised to spend $1 trillion on rebuilding highways, bridges, hospital and other U.S. infrastructure. Additionally, he is seeking a historic 10% increase ($54 billion) in military spending on tanks, ships and weapons systems, and a corresponding cut in non-defense spending, particularly foreign aid, environmental programs and domestic agencies. He is also likely to propose more spending on public safety, including more efforts to stop illegal immigration.

With an increase in defense spending, defense ETFs - SPDR S&P Aerospace & Defense ETF XAR, iShares U.S. Aerospace & Defense ETF ITA and PowerShares Aerospace & Defense Portfolio PPA will likely enjoy smooth trading. All these funds have a Zacks ETF Rank of 1 or ‘Strong Buy’ rating (read: Reasons to Buy Defense ETFs Despite Trump's Twitter Attacks).

Further, big infrastructure spending will be a huge boon to industrial ETFs like First Trust RBA American Industrial Renaissance ETF AIRR having a Zacks ETF Rank of 1.

Tax Cut Plans

In early February, Trump promised to announce a 'phenomenal' tax cut plan soon. Any move in this regard  will be closely watched. Currently, the U.S. has the second highest statutory corporate tax rate of 35% in the world, trailing only Japan, which has a 39.54% tax rate. The President is seeking to slash corporate tax to as low as 15%. As per the Tax Foundation, Trump’s tax reform will reduce federal taxes by $4.4 trillion to $5.9 trillion over a decade, increase GDP to 6.9–8.2%, and create 1.8–2.2 million jobs. Trump has also called for a 20% border tax on U.S. that could lead to more jobs in the country (read: Trump Tax Talk Boosts Market: Time for Momentum ETFs?).

While most of the sectors in the S&P 500 stand to benefit from the tax cuts, consumer discretionary, financials and technology will be the biggest beneficiary. In particular, annual profit of the six largest U.S. banks could jump by an average of 14% if the President delivers on his promise to cut corporate taxes. As a result, SPDR S&P Bank ETF KBE and PowerShares KBW Bank Portfolio KBWB are expected to gain the most. Both products have a Zacks ETF Rank of 1.

Apart from corporates, Trump is also seeking to simplify the tax code for Americans by slashing the number of brackets from seven to three and lowering top tax rate from over 39% to 33%.

Healthcare Reforms

Trump has prioritized the healthcare reform over the tax reform, which will not come until a plan to replace and repeal the Affordable Care Act or Obamacare are set in place. As such, Trump is expected to offer details on his health-care overhaul efforts. Obamacare has proven its efficacy in many states despite several pitfalls. According to the latest data provided by the Department of Health and Human Services (HHS), more than 11.5 million Americans signed up for health insurance through the ObamaCare marketplace as of Dec. 24, 2016. This was up 286,000 sign ups during the last comparable period.

Repealing Obamacare would raise the number of Americans without insurance by 24 million and increase the deficit by $137 billion over 10 years, according to a June 2015 report by the nonpartisan Congressional Budget Office. This could negatively impact SPDR S&P Health Care Services ETF XHS, which tracks the performance of companies in healthcare services, healthcare facilities, managed healthcare and healthcare distributors. The ETF has a Zacks ETF Rank of 3 or ‘Hold’ rating (read: Welcome Trump Era with These ETFs).

Additionally, other healthcare ETFs including iShares U.S. Healthcare Providers ETF IHF, Health Care Select Sector SPDR Fund XLV, First Trust Health Care AlphaDEX Fund FXH,Vanguard Health Care ETF VHT and iShares U.S. Healthcare ETF IYH are in focus. All these funds have a Zacks ETF Rank of 3.

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