The newly elected 114th Congress will consist of a Republican majority. The certainty about political impact on the economy and capital markets pretty much stops there. However, the news for businesses and investors is less about what will happen and more about what will not happen.
Democrats will not rule the agenda as they have in recent years and the industrial sectors that tend to perform best under Republican rule will at least be given enough room to grow to their greatest potential, absent any real or perceived barriers that may have kept a lid on upside potential in recent past.
Although the economy and stock market, on average, have historically performed better under Democratic rule, there are some industrial sectors that tend to do best when Republicans have the upper hand.
Here are 3 great sector funds that have potential to benefit most from a Republican majority in Congress.
Sector Funds for a Republican Congress: Vanguard Financials ETF (VFH)
There’s not much argument against the fact that tight credit standards are among the darkest of clouds hanging over the economy. Republicans have generally favored looser regulations for large financial institutions, such as big banks and insurance companies, than their Democratic counterparts.
For example, many Republicans have voiced their opposition to the tight regulations on big banks set forth in the 2010 Dodd-Frank bill.
With this in mind, your best bet to cover the large-cap style and avoid the hit-or-miss strategies of actively-managed funds is to go with a low-cost index ETF like Vanguard Financials (VFH).
You’ll hit big banks with top holdings like JPMorgan Chase & Co (JPM) and big value plays like Berkshire Hathaway Inc (BRK.B).
Adding an edge to performance, you can’t beat the rock-bottom expense ratio of 0.19% — just $20 per $10,000 invested.
Sector Funds for a Republican Congress: Fidelity Select Defense & Aerospace Portfolio (FSDAX)
The defense sector, not to be confused with the consumer defensive sector, is also known as the military industry. Although the U.S. won’t necessarily jump into war just because of a new Republican majority, defense stocks might get a boost with a hawkish Senator like John McCain as a Ranking Member of the Senate Committee on Armed Services.
You won’t find many mutual funds or ETFs that focus on the defense sector, but a solid choice is Fidelity Select Defense & Aerospace Portfolio (FSDAX), which invests in companies such as Honeywell International, Inc (HON) that often do contract work with the military, and companies that sell material and equipment to support U.S. aero-defense, such as Boeing Co (BA).
Expenses are a reasonable 0.81%, and the initial investment amount is $2,500.
Sector Funds for a Republican Congress: Energy Select Sector SPDR (XLE)
Falling oil prices have sucked the fuel out of the energy sector in recent months, but a Republican majority in Congress might be just the spark needed to light up the sector and related sector funds. Even if new legislation is not passed, Republicans will at least block tougher environmental restrictions on fossil fuel companies or perhaps revive the Keystone pipeline debate.
A solid ETF like Energy Select Sector SPDR (XLE) can provide a strong combination of broad energy sector exposure, low expenses, and solid returns for a pure energy sector play.
You’ll find top energy names, such as Exxon Mobil Corporation (XOM) and Halliburton Co (HAL), in the portfolio.
Furthermore, the regional exposure for XLE is nearly 100% North America, which solidifies its position as a standout energy sector play for a prospective boost in the U.S. energy sector.
Expenses are a drop in the energy bucket at 0.16%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
