It’s been a few weeks since the midterm elections in the U.S. and the final races/recounts are all done..almost. The results may be less than desirable from a policy-passing point of view. What are we left with? Plenty of political gridlock ahead.
The Democrats have flipped the house — winning enough seats to be the majority party in the House of Representatives. Meanwhile, Republicans retained control of the Senate. This means that the Democrats have a pretty tight lock on preventing the Trump Administration from doing much of anything in the next two years. At the same time, the Republican Senate means that the House won’t be able to pass really any progressive legislation packages either.
That is unless there is some common ground.
Before you laugh, there is some common ground between the R’s & D’s. A couple of bipartisan issues could make their way into law this year. And luckily ETFs can help you capitalize on that potential. With that, here are the three best ETFs to own for the political gridlock ahead.
iShares US Aerospace & Defense ETF (ITA)
While the Republicans often get the nod as being friendly to the defense contractors, the Democrats are not completely opposed. This year, through bipartisan efforts, Congress jointly approved the latest $717 billion spending package for the Department of Defense. The Democrats were key in making money available for things like cybersecurity and automated warfare. Clearly, despite the talk, the defense spending is still going to go through a gridlocked Hill.
That makes defense funds like the iShares US Aerospace & Defense ETF (NYSEARCA:ITA) some of the best ETFs to hold throughout the next two years.
ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index, which is made up of all the defense stocks in the U.S. This includes leaders like Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA). The beauty lies within the ETFs other 36 holdings. ITA holds plenty of smaller and mid-sized defense contractors and hardware producers. These firms offer plenty of growth potential and capital appreciation as M&A targets or in a major contract win scenario.
The total combination of all these firms has allowed ITA to be one of the best performing ETFs over the last few years. The fund has managed to score a ten-year average annual total return of 17.41%. with gridlock now the common theme, ITA should be able to keep that performance up.
However, one potential headwind for ITA could come from the executive branch. If the word of President Trump can be believed, he now thinks defense funding is “crazy.”
Global X U.S. Infrastructure Development ETF (PAVE)
If there is one area to look for the best ETFs during political gridlock, it has to be infrastructure. President Trump has long been a fan of rebuilding America’s roadways, bridges, and the electrical grid. He even called for over $1 trillion in spending to get the job done and has held five infrastructure weeks. The Democrats have also been clamoring for more pick and shovel plans to boost infrastructure. It’s here that both parties could finally be ready to send Trump some sort of plan to sign and jump-start a new New Deal.
There are plenty of infrastructure ETFs out there. However, the Global X U.S. Infrastructure Development ETF (NYSEARCA:PAVE) could be the best one. The problem is that most infrastructure ETFs focus on the stocks that own finished assets like toll-roads. That makes them cash flow instruments and focused on dividends. PAVE is different.
The fund tracks the INDXX U.S. Infrastructure Development Index. This index focuses on those firms that do the heavy lifting, provide components and raw materials for infrastructure/construction. This focus makes it more of a play on any bipartisan spending plan. Picks and shovel profits over collecting dividends from use.
With an expense ratio of just 0.47%- or $47 per $10,000 invested, PAVE offers the best ETF to play political division and the potential for an infrastructure bill.
HealthCare Select Sector SPDR Fund (XLV)
With the Democrats winning the House, one thing is certain: Obamacare isn’t going away any time soon. That’s a huge win for the healthcare sector and the ETFs that track it. And while there has been much talk about rising drug prices and the need for reform, the truth is, that reform may not come anytime soon. Many of the pro-pharma Democrats won reelection, while the Republican-controlled Senate will put the brakes on these efforts. That makes healthcare stocks and ETFs a great play over the next year or so.
With more than $20 billion in assets and hefty daily trading volume of nearly 4 million shares, the HealthCare Select Sector SPDR Fund (NYSEARCA:XLV) is the biggest way to track the largest healthcare stocks in the U.S.
XLV’s mandate is simple to understand. It owns all 63 healthcare stocks that are included in the venerable S&P 500, including sector stalwarts like Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE). And while that pool of stocks may be small, the XLV does touch on all the various healthcare subsectors: pharmaceuticals, healthcare services firms, equipment and biotechnology. This broad scope and focus make the XLV one of the best ETFs to tackle the industry. When you add in the ETF’s low expenses ratio of just 0.13%, it’s even better.
Disclosure: At the time of writing, Aaron Levitt did not own a position in any of the stocks mentioned.