Democratic presidential candidate Joe Biden speaks at a campaign event in Wilmington, Del., on July 14, 2020.Leah Millis/Reuters
With the U.S. election just over three months away, the latest polls suggest the political winds are changing, with the Democrats poised to take over the White House after four years of Republican rule.
But if the past few U.S. elections are any guide, it's hard to gauge the outcome accurately, especially one involving current U.S. President Donald Trump.
So how should investors structure their portfolio for what may come? Which exchange-traded funds may be worth buying or selling? Advice from investment managers runs the gamut from leaving your assets alone to bracing for more volatility to targeting sectors that might see a boost if presumptive Democratic nominee Joe Biden becomes the 46th American president, especially if the Democrats are also able to sweep the House and the Senate. Polls currently suggest the Democrats will win the House, but that the battle for Senate is close.
Mr. Biden has stated he’ll reverse most of Mr. Trump’s corporate-tax cuts if elected. His Democrats are also expected to increase regulation on carbon emissions and the financial sector, emphasize renewable energy, tackle climate change, curb subsidies to oil producers and scrutinize the health-care sector, including drug prices.
Even amid the ongoing coronavirus pandemic, some U.S. stocks have risen to new highs and are trading at “ridiculously high multiples,” says John De Goey, portfolio manager with Wellington-Altus Private Wealth Inc.
Meanwhile, unemployment is high and economic output is contracting, “and no one seems to think that’s a problem,” Mr. De Goey adds. “I think the evidence is overwhelming that we’re in for a rough go [on the stock markets].”
“If Biden gets elected and [his party] raises taxes, then corporate profits will go down because [companies] will be paying more taxes,” Mr. De Goey says. Compounded with the economic impacts of the pandemic on various industries, “I don’t know how you can’t worry about that.”
Investors concerned about the election's outcome might turn to safer investments, including silver and gold, Mr. De Goey says.
He says the iShares S&P/TSX Global Gold Index ETF (XGD-T) or another precious metal ETF might be worth a look. XGD’s management expense ratio (MER) is 0.61 per cent, it has assets under management (AUM) of $1.6-billion and a one-year return of about 59 per cent. (All data from Morningstar as of July 20.)
“They’re all going to perform the same sort of role as a store of value,” he says.
Another way to play defence is to look at short-term bond ETFs, Mr. De Goey says, such as the BMO Ultra Short-Term Bond ETF (Accumulating Units) (ZST.L-T), which invests in bonds with a term of one year or less and reinvests earned interest instead of paying it out in distributions. Its MER is 0.16 per cent with an AUM of $453-million and a one-year return of 2.3 per cent. It has no yield because interest is reinvested, but the yield on its companion ETF that does dole out distributions is 2.8 per cent.
“You’re not trying to make money, you’re just trying not to lose money,” Mr. De Goey explains.
More volatility is likely if Mr. Biden brings in more regulation, which could hit high-growth stocks, including technology plays, says Hussein Rashid, vice-president and ETF strategist at Invesco Canada Ltd.
Investors may turn to defensive sectors and search out low-volatility investments as a result, Mr. Rashid says. He points to his firm’s Invesco S&P 500 Low Volatility Index ETF CAD Hedged (ULV.F-T), which invests in the least volatile stocks in the S&P 500. It has an MER of 0.30 per cent, AUM of $256.1-million and has dropped by about 6 per cent over the past year.
He says other investors may want to even out the technology-heavy nature of the S&P 500 and invest in an equal-weight version of the index, such as the Invesco S&P 500 Equal Weight ETF (EQL-T). It has an MER of 0.26 per cent, AUM of $46-million and a one-year return of 2.1 per cent.
Higher regulation could also hurt U.S. financial stocks that benefited from deregulation under Mr. Trump, says Chris Konstantinos, chief investment strategist with Riverfront Investment Group, based in Richmond, Va. “It’s been an easier operating environment for them on a bunch of different fronts. As [Mr.] Biden’s probability of winning has increased in the polls recently, you’ve also seen financials struggle, and I don’t think that’s a coincidence,” he notes.
Mr. Konstantinos says the renewable-energy sector could also get a boost if Mr. Biden wins, adding that a Democratic sweep would likely “be negative for Big Oil, positive for wind, solar, electric vehicles and biofuels.”
Another sector that could benefit is infrastructure, given that government – regardless of who wins the election – is expected to spend more on roads and buildings to get people and businesses back to work after the pandemic, Mr. Konstantinos notes.
“It’s a decent play regardless,” he says.
For advanced do-it-yourself investors who feel the market will fall, Mr. De Goey suggests the Horizons BetaPro S&P 500 Daily Inverse ETF (HIU-T). It has an MER of 1.4 per cent, AUM of $50.9-million and a one-year loss of 18.3 per cent.
HIU is for investors who “want to take a position that you’re bearish on the market and want to profit from things going down,” he says. It resets daily and aims to do the opposite of the daily performance of the S&P 500.
“The idea is that the product will go up when markets go down,” Mr. De Goey says.
Dan Bortolotti, portfolio manager with PWL Capital Inc., says investors shouldn’t attempt to reposition their portfolio in the hopes of predicting the election outcome. Mr. Trump wasn’t expected to win in 2016, and the assumptions of what would happen if he did “were all wrong,” he says.
“Investing with that kind of big-picture strategy is futile,” Mr. Bortolotti says. “There are so many inherent assumptions in that, and many of them don’t hold up to scrutiny.”
Mr. Bortolotti recommends investors have exposure to the broad U.S. market as part of a long-term investment strategy. Two funds he says fit this description are the iShares Core S&P U.S. Total Market ETF (XUU-T) or the Vanguard U.S. Total Market ETF (VUN-T). XUU has an MER of 0.07 per cent, AUM of $1.2-billion and a one-year return of 13.2 per cent. VUN has an MER of 0.16 per cent, AUM of $2.5-billion and a one-year return of 14.1 per cent.
Overall, Mr. Bortolotti believes investors are better off having a diversified portfolio, staying disciplined and rebalancing as necessary. “Over the long run, it usually works,” he says.
Mr. Konstantinos says investors need to beware of “prevailing wisdom” when it comes to what might happen with the U.S. election because it might not come to pass.
“Over the long term, politics aren’t as much a driver of corporate earnings as people think they are,” he says, adding that good companies are able to succeed regardless of which party is in power.