4 ETFs to Watch If Tax Breaks Pass | ETF Trends

The government is all about the helping hands these days: the Fed and its $600 billion Treasury buying program, the ongoing Bush-era tax cuts debate. All this assistance has to benefit some exchange traded funds (ETFs), right?

The Obama administration stated that the “framework of a deal” includes more than $175 billion in stimulus tax cuts and spending increases on top of another two-year extension for all Bush-era tax cuts, reports Jon Healey for The Los Angeles Times.

Some of the finer points include:

  • Reducing payroll taxes from 6.2% of wages to 4.2% for one year
  • A 13-month extension on unemployment benefits
  • Business writes-offs of 100% on equipment purchases in 2011 and an additional year of higher depreciation allowance
  • Two-year extension on the Opportunity Tax Credit that allows students to write off tuition costs
  • Extending lower rates on the top two tax brackets
  • Adopting GOP’s estate tax at a 35% rate for estates larger than $5 million

According to market news and Wall Street insiders, U.S. stocks will appreciate next year, aided by the 2-year tax extension, remarks Gary Gordon for ETF Expert.

As small businesses keep more money to themselves, wealthier businessmen will help create more jobs by investing and spending their money. Meanwhile, an extension on unemployment benefits provides people with stimulus money to spend, which adds to growth.

These moves are simply better for the economy. Anything that puts more money in the pockets of consumers should benefit economic growth, given that consumer spending accounts for two-thirds of GDP. [ETFs Mixed Following Unemployment Numbers.]

In the last three months, economically cyclical stocks have led the markets, with tech, energy and consumer discretionary stocks leading the way. If bond-buying and continued tax cuts work, check out a few of these ETFs:

  • Index IQ ARB Merger Arbitrage (NYSEArca: MNA): Corporations are sitting on close to $2 trillion in cash. They’ll have to loosen their grip eventually, and they could use it to snap up smaller companies. Use this ETF to capitalize.
  • Vanguard Consumer Discretionary (NYSEArca: VCR): This and other consumer discretionary funds should benefit if consumers use the extra cash for the “want” purchases they’ve been holding off on making.
  • Consumer Staples Select Sector SPDR (NYSEArca: XLY): If nothing else, consumers may well use the extra cash to continue buying staples.
  • PIMCO 1-3 Year U.S. Treasury (NYSEArca: TUZ): If these moves have the intended effect and the economy grows, the Federal Reserve may raise rates. Such a move would put short-term Treasuries in favor.

For more information on market sectors, visit our sector ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.