Trump’s New Policies Could Spell Trouble For These Sector ETFs

From Zacks: President Donald Trump gave a lot to U.S. stocks since election in terms of Trump rally and took the Dow Jones Industrial Average to the 20,000 mark for the first time in history.

His pledges of higher fiscal spending and tax cuts were the main tailwinds (read: Trump Triumphs: Stocks & ETFs to Rock or Shock).

Since election on November 8, the S&P 500-based ETF (SPYFree Reporthas added about 7%, Dow Jones-based fund (DIAFree Report) has advanced about 9.4%, Nasdaq-100 based product (QQQFree Report) has tacked on 7.4% gains while the small-cap index iShares Russell 2000 (IWMFree Report) has returned about 14.6% till January 27, 2017.

Trump took to Twitter earlier to spread his economic ideas, but as soon as he was sworn in on January 20, he started implementing some of the measures for real (read: Welcome Trump Era with These ETFs).

Among his desired steps, plans to impose a 20% border tax on Mexican imports and the immigration ban on Muslims appear to be some of the most significant. Investors should note that though Trump’s proposed policies should do a lot of good to several asset classes and related ETFs, not all corners are fortunate enough to hold the Trump card. Rather these ETFs may fall flat in the coming days. Let’s tell you why.

Will Trump Border Tax Weigh on Consumer ETFs?

Mexico has been a Trump-unfriendly investment due to his plans of building a wall along the border as part of his immigration strategy and making Mexico pay for it. President Donald Trump is now mulling over a 20% tax on imports from Mexico to pay for a southern border wall, though other options are also being considered.

Now, companies that produce U.S. consumer goods in Mexico would certainly pass on an import tax to American consumers. Prices of many goods that are fully or partially foreign-built are likely to go up. Especially costs of Corona, tequila or margaritas will likely escalate.

Several restaurant companies serve beer and use avocados for their dishes. Only a third of all avocados consumed by Americans are home-grown and the rest are imported. And over nine of every 10 imported avocados are from Mexico, as per the source.

In this regard, we would like to mention that stocks like huge the Mexican Avocado user Chipotle Mexican Grill, Inc. (CMGFree Report) and Corona-maker Constellation Brands Inc. (STZFree Report) may be at gunpoint if Trump’s border tax gets effected.

So, one can easily understand the pocket pinch to restaurateurs or beer makers who got their ingredients shipped from Mexico. And these higher commodity prices are most likely to be transferred to consumers’ wallets.

So, Consumer ETFs like iShares U.S. Consumer Goods ETF IYK, Consumer Staples Select Sector SPDR Fund (XLPFree Report) , iShares U.S. Consumer Services ETF IYC and restaurant ETF USCF Restaurant Leaders Fund MENU will come under pressure (read: Will Q4 Earnings Be Sweet or Sour for the Restaurant ETF?).

And needless to say, Mexico ETFs like iShares MSCI Mexico Capped (EWW) will also feel the pinch of border tax. Nevertheless, investors should note that considering a border tax and that implementation of the same is not an easy task, as there are several roadblocks including the NAFTA agreement.

The agreement had tied up the U.S., Canada and Mexico for more than two decades. The deal permitted manufacturers and farmers to do seamless business. So, Trump has to first come out of this treaty before imposing such taxes on Mexico.

Embargo on Immigration

Global airlines are likely to have a hard time with the latest ban on travels by President Donald Trump’s executive order keeping visitors away from seven Muslim-dominated nations. These states are Iraq, Syria, Iran, Libya, Somalia, Sudan and Yemen and the number of people would amount to about 2018 million. But the executive order indicated that the ban could broaden up in the days to come. The move is intended to obstruct terrorism in the U.S.

The order is likely to hurt airlines on both a short-term and a long-term basis. The short-term impact will be a scaling up of costs as airlines will now have to refund for their customers’ planned travel to the U.S. or accommodate them in other ways. And over the long term, airlines will likely lose a customer base.

The pure-play aviation ETF U.S. Global Jets ETF JETS will likely be under stress while stocks like Delta Air Lines Inc. (DALFree Report) , United Continental Holdings (UALFree Report) and JetBlue Airways Corporation’s (JBLUFree Report) may be hit hard.

Apart from airlines, some tech companies who employ foreign workers may find them stuck abroad. So, difficult times may be in the offing for tech ETFs like Technology Select Sector SPDR ETF (XLKFree Report) and stocks like Apple Inc. (AAPLFree Report) .

The Consumer Staples Select Sect. SPDR ETF (NYSE:XLP) was unchanged in premarket trading Tuesday. Year-to-date, XLP has gained 1.22%, versus a 1.80% rise in the benchmark S&P 500 index during the same period.

XLP currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #2 of 46 ETFs in the Consumer-Focused ETFs category.


This article is brought to you courtesy of Zacks Research.