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U.S. Fiscal Deficit at 3.5% of GDP: ETFs in Focus

The United States' fiscal deficit increased 13.6% to $666 billion from $586 billion in the previous fiscal. The government's fiscal year runs from October to September.

Per the Treasury department, the increase was driven by expenditures on medicare, social security and higher costs of financing outstanding debt. The deficit now accounts for 3.5% of the GDP compared with 3.2% last year.

Tax Reform

This increase in deficit comes as the Republicans advance on the tax reform plan promised by President Donald Trump. On Oct 19, the Senate passed a budget of $4 trillion in a 51-49 vote which will allow the Republicans to move ahead with the tax cuts (read: GOP Nears Tax Reform: Buy These ETFs ).

The proposed plan calls for three tax rates, 12%, 25% and 35%. This is likely to add $1.5 trillion to the deficit over a decade. However, the Republicans are yet to deliver a formal tax reform bill as just a little over two months are left for this year to end.

The tax reform is expected to significantly boost earnings. This led to a rally in the stock markets as investors grew more optimistic about Trump delivering on his campaign promises. Moreover, the greenback rallied while bond prices took a dive.

Economic Situation

Economic growth in the United States was stronger than initially expected by the markets. Per the Commerce Department, economic growth was 3% in second-quarter 2017 compared with its earlier estimate of 2.6%. Latest developments in the tax reform are expected to boost GDP growth. Per Steve Mnuchin, Trump's Treasury Secretary, it will offset the loss in federal revenues and lead to a reduction in the debt.

However, it is still too early to jump to that conclusion. A cloud of uncertainty surrounds the U.S. markets. Per latest news reports, Trump is said to be more inclined toward Federal Reserve Governor Jerome Powell to replace Janet Yellen as the Fed chair when her term expires in February 2018. The markets breathed a sense of calm on this report, as Powell is being seen as a candidate who will not steer much from the current Fed policy.

However, there is still a lot of uncertainty with regard to the next Fed chair, as polls predict a close fight. If Kevin Warsh or John Taylor end up as the Fed chair, a faster rate hike policy might be enacted, as both the candidates are seen to be more hawkish. This will lead to increased cost of financing the debt.

Let us now discuss a few ETFs focused on providing exposure to U.S. equities.

SPDR S&P 500 ETFSPY

This fund is the most popular ETF traded in the U.S. markets. It seeks to provide exposure to the largest and most stable companies and tracks the S&P 500 index (read: ETFs & Stocks Gaining from S&P 500's Record Run ).

It has AUM of $251.9 billion and charges a fee of 9 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 23.6%, 14.6% and 14.6% allocation, respectively (as of Oct 19, 2017). The fund's top three holdings are Apple Inc AAPL , Microsoft Corporation MSFT and Facebook Inc FB with 3.7%, 2.7% and 1.9% allocation, respectively (as of Oct 19, 2017). The fund has returned 20.2% in a year and 15.0% year to date (as of Oct 20, 2017). It currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Core S&P 500 ETFIVV

This fund is a low-cost ETF that seeks to provide exposure to the large established U.S. companies and tracks the S&P 500 index.

It has AUM of $131.9 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 23.5%, 14.7% and 14.5% allocation, respectively (as of Oct 20, 2017). The fund's top three holdings are Apple Inc, Microsoft Corporation and Facebook Inc with 3.7%, 2.7% and 1.9% allocation, respectively (as of Oct 20, 2017). The fund has returned 20.3% in the last one year and 15.1% year to date (as of Oct 20, 2017). It currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

PowerShares QQQ ETFQQQ

This fund is a popular ETF that maintains a hefty exposure to U.S. tech companies and tracks the Nasdaq 100 index.

It has AUM of $53.6 billion and charges a fee of 20 basis points a year. From a sector look, the fund has high exposures to Information Technology, Consumer Discretionary and Health Care with 60.2%, 20.8% and 11.1% allocation, respectively (as of Oct 20, 2017). The fund's top three holdings are Apple Inc, Microsoft Corporation and Amazon.com Inc AMZN with 11.6%, 8.7% and 6.8% allocation, respectively (as of Oct 20, 2017). The fund has returned 25.9% in a year and 25.5% year to date (as of Oct 20, 2017). It currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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ISHARS-SP500 (IVV): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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