ETF strategies heading into the U.S. presidential election

Regardless of the outcome of the U.S. presidential election, there could be some clear winners for exchange-traded funds, or ETFs, experts say. 

Whoever becomes president next — former President Donald Trump or Democratic nominee Kamala Harris — will leave their mark on U.S. policy, and that poses challenges to the status quo going forward, particularly when it comes to taxes, regulation and trade.

“They are risks today, but they turn out to be opportunities once we get there,” Kim Wallace, senior managing director and head of Washington policy research at market research firm 22V, said during a webinar hosted by ETF.com in late October.

The panel also included Anu Ganti, U.S. head of index investment strategy at S&P Dow Jones Indices, and Kristina Hooper, chief global market strategist at Invesco.

In the months ahead, some ETFs or funds could outperform depending on the election outlook. For example, those related to Big Tech and digital coin ecosystems could benefit in the case of a second Trump presidency, while funds focused on residential construction, defense manufacturing and elder care may see a boost if Harris wins in 2024, the experts said.

How the battle for Congress plays out will help narrow the considerations, according to Invesco’s Hooper. “We need to distinguish between what can be accomplished in a divided government versus what can be accomplished in a sweep,” she said.

Exchange-traded funds have steadily gained popularity among investors, with ETF assets crossing the $10 trillion mark in September — a trend experts say is largely due to advantages like lower tax bills and fees relative to mutual funds.

Exchange-traded funds are generally known for passive strategies, but there has also been a surge in actively managed ETFs, with the goal of beating the performance of broader markets.

However, most financial advisors caution against making hasty changes to your investment portfolio based on the outcome of this election.

If history is a guide, there have been times when the results on the sector level were “counterintuitive,” Hooper said.

For example, during the first Trump administration there was support for traditional energy as the country leaned toward ramping up U.S. oil production, but “interestingly, during that period we saw energy stocks underperform,” Hooper said.

Alternatively, under the Biden administration, energy stocks performed better. “Sometimes what we think might happen isn’t actually what happens,” Hooper said.

Further, in 2016, the S&P 500 rose 4% in November but there was a “whopping 19% spread among sectors,” according to Ganti. “There was a huge element of surprise there,” she said. “None of us really knows what is going to happen in the future.”

“Surprise is always an element of politics and policy,” said 22V’s Wallace, “so too are expectations rooted in what you can see and price now.”

Despite the likelihood of “very significant volatility” in the near term — or at least until the election is certified in January — there are other drivers like the Federal Reserve’s anticipated interest rate cuts that will impact investors more over the longer term, Hooper said.

“Once we get beyond electoral risk in the U.S., both companies and macroeconomic fundamentals will dominate,” Wallace also said.

In the meantime, “investors should be thinking about a variety of different tools to offer diversification and dampen volatility in portfolios,” said Hooper.

In this case, so-called buffer exchange-traded funds could provide some downside protection.

Buffer ETFs, also known as defined-outcome ETFs, use options contracts to offer investors a predefined range of outcomes over a set period. The funds are tied to an underlying index, such as the S&P 500.

But these ETFs also come with higher fees than traditional ETFs and typically need to be held for a year to get the full benefit.