U.S. voters head to the polls on Tuesday in a presidential
election between two candidates with starkly different views on a
variety of issues. That matters to ETF investors, because the
outcome of the election could have a direct impact on investment
One issue that comes to mind is the future of tax rates. Much
has been said about President Barack Obama's "Obamacare," a piece
of legislation that promises to shake up health care premiums and
the bottom lines of insurance companies, but more importantly to
ETF investors, it could have major tax implications on investment
IndexUniverse Analyst Carolyn Hill earlier this year outlined
just how much higher taxes on things like dividends, interest, and
short- and long-term capital gains could be if Obamacare does
indeed get rubber-stamped. For the record, Republican-party
candidate Mitt Romney has said that if elected, he will overturn
Taxes would be going up by 3.8 percentage points on all joint
filers with adjusted gross income of more than $250,000, and on
single filers with incomes over $200,000-changes that would take
effect a full year before the health law is scheduled to kick in,
Hill said in her blog back in July.
"This additional tax could potentially have a significant impact
on all the dividend-focused
that have been so popular lately," Hill said. "A 3.8 percentage
point tax hike may not seem like a big deal until you consider it
in the context of tax rates as they currently stand-and what they
could rise to if the Bush-era tax cuts aren't extended."
Indeed, dividends are currently taxed at 15 percent, but could
be taxed at 18.8 percent next year, and if Bush-era tax cuts aren't
extended, those rates could soar to 43.4 percent, while taxes on
long-term capital gains would rise to 23.8 percent, Hill said.
More broadly, there's a tacit understanding that taxes are
probably heading higher, even if that's not what either former
Massachusetts Governor Romney or President Obama are saying.
"Everyone believes that taxes on long-term capital gains will
not stay as low as they are in 2012, regardless of who takes
office," ConvergEx Group Chief Market Strategist Nicholas Colas
told IndexUniverse. "We have a big deficit to fill and a 15 percent
tax rate will not do."
That reality, Colas stressed, will remain true no matter who
takes office in 2013, so bracing for higher taxes on capital gains
is pretty much a given.
And while most of the market's attention right now is being paid
to the election itself, Colas said advisors are busy alerting their
clients to the implications of a higher tax rate.
Growing outflows from mutual funds, particularly in equities,
are an indication that many investors are taking to heart the
message that they should be "selling" some of those capital gains
incurred over the years before the end of 2012, Colas said.
The core concern is that investors would be wise to take a
capital gains tax hit now before rates head higher. The ETF piece
comes into focus because they are so much cheaper to own than
mutual funds and, moreover, because most are index funds, they are
more tax efficient than actively managed mutual funds they'd
"This is good for ETFs," Colas said. "People are getting out of
mutual funds they've been in for years, but they want to keep their
allocation the same, so they are switching into ETFs."
Year-to-date, inflows into U.S.-listed ETFs has already
surpassed the total inflows for all of 2011, while outflows from
funds, for instance, have been growing.
"We know those tax rates are unsustainable, so we are going to
see mutual fund outflows and ETF inflows accelerate between now and
the end of the year," Colas said.
On a more granular note, the outcome of the election could have
varying impacts on different economic sectors-and on those ETFs
tapping into those sectors.
In a note published earlier this year, S&P Capital IQ
Analyst Todd Rosenbluth noted that an Obama win would most likely
be beneficial for health care and pharmaceutical companies, as they
continue to implement Obamacare.
Rosenbluth is also bullish on telecommunication names under an
Obama administration, thanks to the government's support and
subsidies geared for broadband expansion.
ETFs such as the Healthcare Select Sector SPDR (NYSEArca:XLV)
and the Vanguard Telecommunications Services ETF (NYSEArca:VOX)
would be sitting in the middle of that action, he said in a S&P
MarketScope Advisor in September.
A Romney win wouldn't derail the policies that are currently in
place that impact those two sectors, but it could also bring
benefits to a slew of other economic sectors such as financials,
transportation stocks and coal.
A Romney administration would likely mean turnover of heads in
many regulatory agencies, particularly those impacting the
"S&P Capital IQ believes that the [Dodd-Frank] legislation
created a lot of leeway, allowing less stringent provisions,"
Rosenbluth said in the note. "Fair Lending and the Community
Reinvestment Act are major initiatives of the current Department of
Justice, and we think there would be less pressure on the banking
industry from a Romney administration."
Financial-focused ETFs abound, but Rosenbluth pointed out the
iShares S&P Global Financials Sector Index Fund (NYSEArca:IXG)
as one of the funds that stand to gain from a Romney win.
"The current administration has worked against the coal industry
and coal-fired plants, by adding regulation," Rosenbluth added in
the note, pointing out what coal-and transportation companies-stand
to gain from an Obama defeat.
"Coal accounts for 25 percent of total railroad revenues, and
our analysts think that the rails would benefit from further
encouragement of drilling in shale regions since they transport
much of the needed pipe and sand along with outbound oil products,"
But at the end of the day, ETF investors could win and lose no
matter who takes office in 2013. "This is largely a zero-sum
game, as one industry or sector that could benefit from an Obama
re-election could be hurt by a Romney victory," Rosenbluth
Deeply Split Electorate
Finally, in a broader sense, the upcoming election could end up
making the rift between conservatives and liberals a little
That seems even more likely on the heels of Hurricane Sandy's
destruction along the eastern shore.
"Superstorm Sandy is a crisis for millions of Americans, just as
the Financial Crisis and Great Recession challenged-and continue to
challenge-similar numbers of citizens," ConvergEx's Colas said in a
note published this morning.
"How government-Federal, state and local-respond to crisis has a
disproportionate impact on how many Americans view its efficacy in
more mundane matters."
More to the point, Hurricane Sandy has likely increased chances
of Romney winning the popular vote-even if Obama's re-election
seems more probable than a Romney victory at this time. In other
words, Obama could win the presidency in the electoral college, but
risks losing the popular vote.
Colas said that seems more probable after the storm because the
damage wreaked by Sandy appears to have disproportionately affected
Democratic-leaning voting precincts, meaning a big enough number of
Obama supporters may not get to cast their ballots, causing a
That split is something that would be detrimental to the future
of the U.S. economy, as prospects of any effective government
compromise and action needed to keep it from sliding back into a
recession might be doomed.
"The classic case study is the 2000 presidential campaign, where
then-Vice President Al Gore won the popular contest by over 500,000
votes but lost the Electoral College after a Supreme Court case,"
"While the current rancorous state of D.C. politics has many
fathers, the 2000 election would pass any paternity test in
assessing why Democrats and Republicans haven't shared their toys
over the past decade," he added.
The so-called fiscal cliff marked by reduced spending and
increased taxes-something many expect to materialize in an Obama
win-is a "very scary issue," Colas told IndexUniverse.
Partisan rancor aside, Colas said the fiscal cliff calls for
"Congress to work on a coherent fashion" if it is to address this
But split loyalties will all but ensure a lack of productivity
in Washington if one candidate has the office and the other the
bragging rights from winning the popular vote.
"Not being productive for another four years is certainly
something we can't afford," Colas said.
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