It has been said that the 2012 presidential election is one of epic proportions. While politicians and the copious amounts of advertisements they run during an election year are known for some exaggeration, there is only slight hyperbole in saying this presidential election will be one of the most important in some voters’ lifetimes.
With the margin between the President and challenger Mitt Romney narrow in most polls, this election is shaping up to be one that political buffs will remember for generations. It also is shaping up to be one that will have a profound impact on portfolios of all sizes.
There are crucial factors to keep in mind. Stocks historically fall in anticipation of a Democrat taking the White House and rise when the market thinks a Republican is going to win. The post-inauguration day results tell a different story. Equities historically perform better when a Democrat is in the White House, presumably because the market realizes it was scared for no good reason. Conversely, the market typically winds up disappointed with Republican administrations and equities have a tendency to lag under these regimes.
Another issue to be aware of is that stocks typically perform well in election years and then give back some of those gains in the year following the election. U.S. equities have lived up to the election excitement as the SPDR S&P 500 (NYSE: SPY) is up 9.6%. The SPDR Dow Jones Industrial Average (NYSE: DIA) is higher by 6.2% while the PowerShares QQQ (NASDAQ: QQQ) has led the way with a remarkable surge of almost 16%.
With the United States attempting to fight enormous fiscal deficits and the looming problems of entitlement spending still far from solved, you could argue that it does not matter who wins this election because more of the same in Washington could mean U.S. stocks will immediately be vulnerable to a new Romney administration or the continuation of the Obama establishment.
That is not a doomsday prognosis, but the volatility that could ensue following the November elections means the following list of exchange-traded funds (ETFs) almost certainly will be in play. Simply put, these are the "must know" ETFs ahead of the 2012 presidential election.
The SPDR Gold Shares (NYSE: GLD) could be placed here as well, but for long-term investors the iShares Gold Trust is the better option because it features a lower expense ratio. Gold ETFs were in a significant downtrend after spiking higher the first two months of 2012 but have rallied since QE3 became inevitable in late summer. The primary reason for that slack performance has been the surprising view of gold as a risk asset.
The thesis here is simple: On a historical basis, gold has not been viewed as a risk asset. Rather, it is a "shelter from the storm" play and despite recent strength in the U.S. dollar, the outlook remains stormy for the world’s reserve currency.
Regardless of who wins the upcoming election, it is likely that that candidate will pay great lip service to bolstering the strength of the dollar. It also is likely he will not be able to do anything about the dollar’s demise without an ominous combination of tax increases and substantial cuts to entitlement spending.
The smart money says neither of those scenarios will come to pass and that means gold’s luster will remain intact immediately after the election and long thereafter.
Historical footnotes aside, President George W. Bush did do one good thing for income investors by lowering the tax on dividends to 15%. Simply put, an income investor that collects $10,000 a year in dividend is obligated to pay $1,500 of that sum to Uncle Sam. However, that rate is not all that bad when looking at the tax rates on personal income. A lower tax rate on dividends has a tendency to encourage more investors to seek out equities rather than bonds as an avenue for generating income, which, in turn, is good for stocks.
Believe it or not, during the 2008 presidential campaign, then-Senator Obama raised a lot more cash from Wall Street than Sen. John McCain did. This surprised many political observers because Wall Street typically directs the bulk of its political contributions to Republicans. From the Chicago commodities pits to Goldman Sachs to Warren Buffet to hedge funds of all shapes and sizes, Obama was the toast of Wall Street, even while the market seemed to fall every day a new poll was released highlighting his commanding lead heading into election day.
Wall Street loved the now-president, but that was before it looked like he would attack the Bush-era tax cuts, which would lead to higher dividend taxes. For now, it looks like a dividend tax increase has been averted, (at least for those earning less than $250,000 a year).
However, dividends still remain a vital part of a portfolio’s overall returns, and all investors need at least some exposure to dividend stocks and ETFs. The Federal Reserve has pledged to keep interest rates low through mid-2015, meaning that investors are better served being involved with dividend stocks and ETFs than Treasuries and money market accounts.
In terms of sector ETFs, the iShares Dow Jones U.S. Medical Devices Index Fund does not get a lot of press, but its place on this list is warranted. In all the debate and scrutiny on the Affordable Care Act, also known as Obamacare, an important fact got lost in the shuffle.
That fact is that the most sweeping health care legislation this country has seen in generations contains a punitive tax on medical device makers that has yet to go into effect. To this point, it can be argued that Obamacare has not hurt IHI...yet. However, the pain train may arrive next year because Obamacare was upheld and the tax on medical device makers will go into effect at that time.
A study by the Battelle Technology Partnership Practice found the tax on medical device makers could lead to the loss of tens of thousands of jobs and billions of dollars of lost economic output. Assuming Obamacare remains in place and the tax on medical device makers is not dealt with in a favorable manner, IHI could suffer. In other words, a Romney victory could be a boon for this ETF.
The Market Vectors Oil Services ETF has been a surprisingly strong performer, for the most part, since President Obama moved to the White House. The reasoning behind OIH's shock-value performance is because of the current administration’s ill-fated infatuation with alternative energy. Not only that, but this president has not spent all of his vitriol-laden rhetoric on Wall Street banks; he has saved plenty of it for big oil companies.
To be fair, domestic production of fossil fuels is on the rise in the U.S. because of the shale boom, a trend that does not look like it will abate any time soon. Still, it is tempting to think about how oil services’ stocks could perform under an administration that is, shall we say, more hospitable to upside in these stocks.
OIH is a volatile, fast-moving ETF chock full of many of the best names in the oil services industry. Its performance immediately following the election could be a tell-tale sign regarding how the energy sector at large will perform over the next couple of years.
Other ETFs To Take Note Of
If you’re interested in more ETFs to keep an eye on, you should be looking at the emerging markets sector…and not the usual suspects of Brazil, China, India, and South Korea. To learn about five specific emerging market ETFs that I believe are ready to breakout, check my new special report: “5 ETFs For Emerging Markets.”