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Trump Unveils First Budget Blueprint: ETFs to Gain or Lose

Sweta Killa

President Donald Trump has presented the first budget proposal for 2018 to the Congress. The $1.15 trillion budget blueprint calls for a boost in military spending and a down payment on a US-Mexico border wall with simultaneous cuts to non-defense spending across various government agencies.

The government agencies that will see drastic cuts in their spending are as follows: 31% in Environmental Protection Agency (EPA), 29% in the State Department, 21% each in Labor and Agriculture Department, 20% in National Institutes of Health (NIH), 18% in Health and Human Services, 16% each in U.S. Army Corps of Engineers, and Commerce, 14% in Education, 13% each in Housing and Urban Development, and Transportation, and 12% in Interior. Other agencies like Treasury, NASA, DOJ Justice, and Small Business Administration will see slight reduction in the range of 1% to 5%.

Congress needs to pass the proposal latest by April 28, when the regular funding bill for most agencies expires to avoid partial shutdown.

The major takeaways from the budget and its expected impact on ETFs are as follow:

Boost to Defense Spending

Trump has proposed a 10% or $54 billion increase in the Pentagon defense budget to ramp up the 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 and will boost total spending for the Defense Department to $639 billion for fiscal year 2018. The proposal also aims to increase 6% spending in Veterans Affairs and 7% in Homeland Security (read: Trump's Defense Spending Plans Make these ETFs Buys Again).

The increase will be financed by $54 billion in cuts to foreign aid and domestic agencies that had been protected by former President Barack Obama.

The plan if pass through the Congress would be a huge boon to the defense industry, which currently has a solid Industry Rank in the top 39%. As a result, defense ETFs – PowerShares Aerospace & Defense Portfolio PPA, iShares U.S. Aerospace & Defense ETF ITA and SPDR S&P Aerospace & Defense ETF XAR are likely to surge. These funds have a Zacks ETF Rank of 1 or ‘Strong Buy’ rating.

Appeal for Payment of Mexico Border Wall

Trump has requested Congress to approve $1.5 billion for the border wall between the U.S. and Mexico in the current fiscal year, in addition to $2.6 billion in fiscal 2018. The move is in line with Trump’s promise of building a wall to keep Mexican immigrants away since its campaign. Trump has repeatedly asked Mexico to pay for it but Mexico has denied. This would hurt iShares MSCI Mexico Capped ETF EWW, which offers a diversified exposure to the Mexican stocks. The fund has a Zacks ETF Rank of 4.

Cuts to Climate Change Program

The proposed budget seems to reduce clean climate funding and unwind Barack Obama's signature ‘Climate Power Plan’ and a Paris Climate treaty aimed at curbing global warming. This is because Trump plans to cut all the climate-based programs at the EPA, State Department, NASA, and Department of Energy and the ones that enforce clean air and water laws. It would threaten thousands of jobs and could harm health and safety protection for millions of Americans (read: Future of Clean Energy ETFs in Trump Era).

The spending cuts also target elimination of grants for agencies that monitor and implement compliance with environmental laws, and regional projects intended at benefiting degraded areas such as the Chesapeake Bay, Puget Sound and the Gulf of Mexico. Regional programs to clean up the Great Lakes supported by Barack Obama, would also be eliminated.

While this would provide a huge upside to companies relying on dirty fuel sources like coal, the low carbon and clean energy space would be hit hard. That said, VanEck Vectors Coal ETF KOL is likelyto be the biggest winner. On the other hand, First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN, PowerShares WilderHill Clean Energy Portfolio PBW, iShares Global Clean Energy ETF ICLN, iShares MSCI ACWI Low Carbon Target ETF CRBN and SPDR MSCI ACWI Low Carbon Target ETF LOWC will likely see rough trading.

Investors should note that both coal and alternative energy boast solid a Industry Rank in the top 28%. KOL has a Zacks ETF Rank of 3 or ‘Hold’ rating while QCLN has a Zacks ETF Rank of 4 or ‘Sell’ rating (read: Can Coal ETFs Pick Up Steam in 2017?)

Reduction in Discretionary Programs for Poor

The budget plan is detrimental to the poor. This is because Trump is seeking to reduce programs aimed at improving nutrition among low-income women and children. It includes reduction of $200 million from the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which directly provides baby formula, healthy food, nutrition counseling, and more to poor mothers with young children. Consumer Staples Select Sector SPDR Fund XLP could be in trouble if WIC funding is slashed as the ETF offers exposure to the essential products across America. XLP has a Zacks ETF Rank of 3.

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