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Trump Tax Talk Boosts Market: Time for Momentum ETFs?

Sanghamitra Saha

On February 9, the U.S. market cheered President Donald Trump’s indications of a tax overhaul in a few weeks. Among the top ETFs, investors saw SPY and DIA add about 0.6% and QQQ move higher by 0.4% on the day (read: Large-Cap Growth ETFs Leading the Market).

Donald Trump intends to beef up public spending by hundreds of billions of dollars on infrastructure. In fact, he has proposed $1 trillion infrastructure spending financed by new tax credits to goad private equity investors. Increased outlays will be aimed at improving roads, bridges and telecommunications.

He also promised lower corporate taxes and ease in regulations. Since these measures are expected to balloon federal deficit, Trump also sought to put an embargo on Federal Government employment to keep a check on payrolls (read: Welcome Trump Era with These ETFs).

Meanwhile, Trump already announced or enacted several of his economic pledges – including the immigration curb, travel ban, border tax, termination of trade agreements and financial deregulations – just after taking the seat in mid-January.

Thus, market watchers started seeing the enactment of tax cuts soon. Investors should note that Trump would relax tax rates from the current seven brackets to three brackets: 12%, 25%, and 33%. Top earners are likely to experience a tax cut from 39.6% to 33%.

Overall, prospects of a reduction in the tax burden on American corporate houses was well received by investors and stocks surged. Meanwhile, a favorable earnings growth backdrop perked up investors’ mood even further.

As of now, combining the actual results from the 346 members of the S&P 500 index with estimates from the still-to-come constituents, total earnings are expected to be up 7.4% from the same period last year on 3.9% higher revenues, reflecting the highest earnings and revenue growth in two years.

How About Momentum Plays?

In such a scenario, equity investors can definitely cash in on the trend. Thus, momentum investing might be an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks that are sizzling on the market.

Agreed, concerns still prevail as we are yet to see how the U.S. economy benefits from fiscal reflation with Trump’s protectionist foreign policies in place. Still, investors who believe that the trend is their friend, may find momentum investing intriguing. Also, with global markets rebounding, the likely tax cuts in the U.S. may usher in astounding gains in the coming days.

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

PowerShares DWA Momentum & Low Volatility Rotation Portfolio DWLV

The fund follows the Dorsey WrightMulti-Factor Global Equity Index, which is designed to gain exposure to U.S. or international equity markets through the universe of up to eight PowerShares momentum or low volatility ETFs. The fund charges 15 bps in fees (read: 6 ETF Ideas Most Favored by Issuers in 2016).

Fidelity Momentum Factor ETF FDMO

The Fidelity U.S. Momentum Factor Index reflects the performance of stocks of large and mid-capitalization U.S. companies that exhibit positive momentum signals. It charges 29 bps in fees.

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 Health Care hold the top two positions in the fund.

PowerShares DWA Momentum ETF PDP

The fund looks to track the Dorsey Wright Technical Leaders Index.It includes about 100 U.S. companies from the NASDAQ US Benchmark Index. Top sectors of the fund are industrials, IT, consumer discretionary and financials. The fund charges 64 bps in fees.

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SPDR-DJ IND AVG (DIA): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
ISHRS-MSCI US M (MTUM): ETF Research Reports
 
PWRSH-DWA MO&LV (DWLV): ETF Research Reports
 
FID-MOM FACTOR (FDMO): ETF Research Reports
 
PWRSH-DWA MO PO (PDP): ETF Research Reports
 
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