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David Dierking

ETF Watchlist: Week of March 27, 2017

This past week has less about stocks and more about how events in Washington affected stocks. After several days of negotiation, the Trumpcare bill failed to even get to the House floor. The markets had been pricing in a “no” vote leading up to Friday and stocks were little changed in response to the news. With Republicans conceding defeat on healthcare, the next item on the Trump agenda, presumably tax reform, now becomes the focus.

Politics takes center stage again this week, but this time it’s coming from across the pond. U.K. Prime Minister Theresa May is scheduled to begin the Brexit process this week and with it the questions surrounding the impact of how the country and its economy will unwind itself from the European Union. Europe actually presents some intriguing investing opportunities right now for those looking to diversify away from domestic equities.

With those things in mind, here are four ETFs that I’ll be watching this week that could see some heavier than normal activity.

iShares MSCI United Kingdom ETF (EWU)

Outside of the initial volatility and reaction when the vote took place, investors have largely taken Brexit in stride. The U.K. stock market has been on a steady climb since the U.S. election and now sits roughly at where it did pre-Brexit.

But the real volatility could be ahead. Once Article 50 is invoked, the real work begins. All of the European nations have trade and financial relationships with each other making unwinding them all the more difficult. Neither the U.K. nor the bigger economies such as Germany and France will want to come out of any negotiations weaker than when they came in giving rise to the possibility that these dealings could get dragged out and unpleasant. Keep an eye on any indications of how the respective governments respond to the actual Brexit process commencing.

Consumer Staples Select Sector SPDR ETF (XLP)

Tax reform seems like it’s next on the agenda for Trump. For a while, he has promised a cut in the corporate tax rate down to 15% and the possibility of a repatriation holiday for cash held overseas. Given how the healthcare vote played out, Trump’s leverage in tax reform negotiations could be weakened and he might be willing to accept a lesser tax cut in order to put one in the win column. Tax reform should have a bigger impact on the markets than the healthcare bill although the administration’s goal of having something in place by August seems aggressive.

One of the big winners of any corporate tax deal should be the consumer staples companies. This sector pays one of the higher corporate tax rates currently and could stand to benefit the most when any legislation gets passed.

iShares Nasdaq Biotechnology ETF (IBB)

Biotech stocks have had a wild ride over the past 12 months as M&A, healthcare reform and the battle over drug pricing have whipsawed this sector back and forth. The short term future of biotechs will likely hinge on a couple factors - how strongly Trump will challenge drug prices and whether or not we’ll see a pickup in merger activity.

I think concerns over drug pricing become less now that healthcare reform is off the table for the time being, Also, M&A is in a bit of a lull right now but names like Bristol-Myers Squibb (BMY) and Acadia Pharmaceuticals (ACAD) are still in play with several other deals being rumored. If we see a big deal announced, it could be the boost the sector needs to move higher.

iShares 20+ Year Treasury Bond ETF (TLT)

We saw a flight to quality following the Fed’s rate hike announcement amid concerns that the Fed might be pushing rates too high too fast. The market is essentially pricing in the fact that Trump tax reform is a done deal, but if the failed healthcare vote weakens the White House’s ability to push through tax reform, equities could be face downward pressure which would likely also result in Treasuries rallying.

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