NAFTA has been renegotiated, the trade war between the United States and China rages on, and Donald Trump continues to push forward with his plan to “put America first.”
For Canadians, figuring out where to invest in the United States can sometimes feel like an exercise in second-guessing what the 45th American president will say or do next. How difficult is it to invest in exchange-traded funds (ETFs) that either take advantage or protect against the policies coming out of the White House?
“There are ETFs that are generally supported by current administration policies and that we favour right now, given long-term trends,” says Brent Vandermeer, portfolio manager and executive director, private client group, at Vandermeer Wealth Management in Ottawa. “But investors also need to keep in mind that timing investments based on presidents has never been a good idea.”
Political leaders are, in general, short-term players within the context of a long-term investment strategy, says Mr. Vandermeer. He cautions against investments that bank too much on political figures and ideologies that may be here today but gone tomorrow.
As an example, he cites the Point Bridge Gop Stock Tracker ETF – its ticker symbol MAGA is an acronym for Mr. Trump’s “make America great again” platform – whose claim to fame is that it favours companies whose executives and employees have donated to Trump Republicans.
“The underlying holdings are not Trump crony companies,” says Mr. Vandermeer. “This ETF is really just based on the idea that if Trump’s intent is to bring manufacturing back to the U.S., then industrial and manufacturing companies should be higher weight in the portfolio.”
Better ETFs to consider would be those with a strong focus on U.S. agriculture – such as the iShares Global Agriculture Index ETF (COW) – and infrastructure. These sectors stand to gain from Trump policies, says Mr. Vandermeer.
Jeff Kaminker, president and chief executive officer at Frontwater Capital Inc., a boutique investment management firm in Toronto, says investors who want to take into account Mr. Trump’s “make America great again” policies should look at ETFs with a large concentration of U.S.-based companies that derive a large portion of their revenue from American customers.
“One route is to choose ETFs that invest heavily in U.S. small-market-cap companies with little to almost no foreign exposure,” he says.
One such ETF, says Mr. Kaminker, is the iShares Russell 2000 ETF (IWM), which is made up largely of U.S.-based companies with market capitalizations of less than $2.7-billion and little exposure to international markets.
“The risk from tariff issues is not going to be significant for this basket [of funds],” says Mr. Kaminker. “Even after the double-digit [market] pullback in October, IWM is up 11 per cent year to date.”
For an ETF that aligns with Trump policies that support infrastructure growth in the U.S., Mr. Kaminker points to the iShares U.S. Infrastructure ETF (IFRA).
“This one fits a nice niche in that it targets U.S railroad, utilities, materials and construction companies,” he says. “This is really designed for those investors looking to benefit from a potential increase in U.S. domestic infrastructure projects, which the U.S. is in need of.”
While it’s a good idea to invest in the sectors favoured by Mr. Trump’s policies, Canadians shouldn’t overlook ETFs that are based on broader indices, notes James Gauthier, chief investment officer at Toronto-based Justwealth Financial Inc., which provides an online portfolio management platform.
The U.S. market has soared since Mr. Trump came into power, says Mr. Gauthier. For investors looking for ETFs that tap into this growth, he suggests the Vanguard S&P 500 Index ETF (VFV).
“The S&P 500 is the most recognized exchange in terms of U.S. investments,” he says. “Anything Trump says ultimately impacts the fate of the United States first, so I think an ETF that uses that benchmark would be a good choice for investors who want to take advantage of the Trump effect on the U.S. stock and bond market.”
Alfred Lee, portfolio manager for BMO ETFs at BMO Global Asset Management, says investors should also look at ETFs with companies in the consumer discretionary sector – think Amazon.com Inc. and the Walt Disney Co. “Unemployment in the U.S. is at a 47-year low, so disposable income is on the rise,” he says. “People are now buying based not only on needs but also wants.”
ETFs that focus on sectors such as railways and airlines are also worth a look because they could get a boost – now that Canada-U.S. trade is sorted out – from the expected increase in cross-border business between the two countries, says Mr. Lee.
But just as investors shouldn’t put all of their eggs in one basket, neither should they let the Trump factor weigh too heavily on their investment decisions, says Todd Schlanger, senior investment strategist at Vanguard Investments Canada Inc.
Policy-driven events, such as NAFTA’s renegotiation, don’t always affect markets as expected, says Mr. Schlanger. That’s why investors need to stay focused on the long term and not react too quickly to what’s happening.
“An example is Brexit, which turned out not to be as significant an event as people believed,” he says. Similarly, while Trump’s promise to dismantle NAFTA created market volatility leading up to and during negotiations, the outcome isn’t likely to have a big impact on investors in the long term.
Investors also need to keep in mind that Mr. Trump’s policies could be short-lived, says Mr. Gauthier at Justwealth.
“Any future president can come in and undo anything that Trump has done,” he says. “Just like Trump has undone policies that were in place before he became president.”