ETF Trends
ETF Trends

President Obama is out with a new budget. If it goes through, the impact could be ugly for some exchange traded funds (ETFs) and lovely for others.

The federal budget as Obama envisions it stands at $3.7 trillion for 2012, which a chunk of it going to Medicare, Medicaid and Social Security. The rest of the budget aims to cut spending in some domestic programs while spending more on other key areas that will, in the long run, lead to more economic growth and keep the United States competitive, says The New York Times.

Here are some areas that ETF investors are going to want to watch as Obama’s budget winds its way through Congress:

  • Oil and gas drillers. Obama proposes new fees and royalty rates in order to “receive a fair return from the development of U.S. mineral resources.” Such fees would save the government $3 billion over the next decade. That could cut into the profits of drillers, but the impact on ETFs could be minimal if oil prices stay high and they continue to rake in profits. SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP) is one of several to watch – 73.6% is allocated to exploration and production corporations, with a nearly even split between large-caps and mid-caps (and a 2.6% allocation to small-caps).
  • Biotech. Under Obama’s plan, the research and development tax credit would be made permanent, which would cost $106 billion over the next decade. If that goes through, biotechnology ETFs like First Trust Amex Biotechnology Fund (NYSEArca: FBT) could continue to gain. Such encouragement in the form of tax breaks would encourage the advancement of new technologies.
  • Nuclear power. A sector that has struggled with a bad reputation has been looked to recently as the future of clean energy. To that end, Obama proposes allocating $36 billion in loan authority for new nuclear power plants. PowerShares Global Nuclear Portfolio (NYSEArca: PKN) has the largest allocation to the United States nuclear energy industry, with 38% of the portfolio’s total weight, so it’s best positioned to benefit from domestic growth.
  • Defense. Watch out. Obama plans to cut defense spending by $78 billion over the next five years, which means the Pentagon’s budget  down to zero real growth, says The Wall Street Journal. iShares Dow Jones U.S. Aerospace & Defense (NYSEArca: ITA), with its concentration of 33 holdings, could be hurting if the companies in it don’t have other sources of revenue outside of the U.S. government.
  • Infrastructure. Obama has made no secret of his desire to invest more in infrastructure. The United States is an aging country; our roads, bridges and transportation systems need some serious work. If he gets his wish, $556 billion will go toward upgrading them. SPDR FTSE/Macquarie Global Infrastructure 100 (NYSEArca: GII), with its 40% allocation to the United States, is best positioned to benefit from the investment.

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.