When the new Trump administration takes office on January 20, it will be accompanied by a policy shift likely to support new investment opportunities. But, as with any change, it also creates an environment of economic uncertainty and risk against a backdrop of elevated valuations and geopolitical tensions.
What are some of the investment themes likely to benefit in a Trump 2.0 administration?
Financials
Financials are likely to benefit from a looser regulatory environment, especially with regard to M&A and IPO activity. This could be favorable for banks.
Crypto
Last June, Trump vowed to make the U.S. the “Crypto Capital of the Planet.” Hyperbole aside, he has named crypto advocate Paul Atkins as his pick to head the SEC. He also created the role of “White House AI & Crypto Czar,” and said he would appoint David Sacks, a former PayPal executive, to the position. It is fair to say that a Trump Administration will be more crypto-friendly than the previous administration.
Industrials
Industrials are likely to get a boost, as well, from Trump’s policies in support of reshoring to the U.S., supporting domestic growth in manufacturing and infrastructure. Defense companies are another likely beneficiary in industrials, and defense budgets are likely to grow, especially in the area of defense technology. Trump is calling for NATO members to increase their spending level to 5% of GDP.
Small-caps
Lower interest rates, a business-friendly environment, and the prospect of more merger & acquisition activity, given a more favorable regulatory environment at the FTC, should benefit small-cap stocks.
Artificial Intelligence
As mentioned previously, Trump has appointed an AI and Crypto Czar, and his administration, supported by a Republican Congress, is expected to focus less on regulation and more on foreign competition versus countries like China. There is a strong likelihood that Trump will repeal President Biden’s AI Executive Order. The order, issued in October 2023, takes a regulation-heavy, multi-agency approach to policing AI. In the absence of federal regulation, there is the rising expectation that state initiatives will fill that void, which could make for a complicated patchwork of AI regulation.
Energy
Trump campaigned on a policy of “drill, baby, drill,” but it is likely that the energy policy in his administration will be more nuanced and pulled in multiple directions. Despite Elon Musk’s key position in the DOGE (Department of Government Efficiency), clean energy policy will likely take a back seat in favor of fossil fuels, natural gas fracking, liquid natural gas (LNG), and nuclear.
Clean Energy
Don’t write off clean energy entirely. Despite Trump’s voiced disdain for electric vehicles and wind power, Biden’s clean energy initiatives massively benefited Republican districts to get it approved. Republicans would be sacrificing billions of dollars of private investment and thousands of jobs if they voted to repeal the Investment Reform Act. And then, of course, there is the Elon Musk factor, which favors EVs and solar, given the billionaire’s business interests.
ETF Plays
Trump-Aligned ETFs
There are a few ETFs designed to align with the so-called MAGA trade and Republican-aligned investments, including the Point Bridge America First ETF (MAGA), Unusual Whales Subversive Republican Trades ETF (KRUZ), and the God Bless America ETF (YALL).
MAGA tracks an index of 150 U.S. large-cap companies whose employees and political action committees strongly support Republican candidates through their donations.
KRUZ mimics the trades made by Republican members of the U.S. Congress and their families, based on their legally required reported transactions.
YALL is actively managed and invests across the market capitalization spectrum. The fund excludes from consideration companies that are seen as left- or liberal-leaning, based on the political initiatives and social policies they support.
In terms of 2024 investment performance, MAGA and KRUZ trailed the overall market, gaining 14.7% and 14.3%, respectively, while YALL was up an impressive 30.3%, helped by top holdings like Tesla, NVIDIA, and Broadcom.
Financial ETF Plays
Investors can get sector exposure to Financials via ETFs such as the Financial Select Sector SPDR Fund (XLF), the Vanguard Financials ETF (VFH), the SPDR S&P Regional Banking ETF (KRE), and the Invesco KBW Bank ETF (KBWB).
ETFs positioned to take advantage of a more favorable environment for M&A activity include merger arbitrage ETFs such as the Proshares Merger ETF (MRGR) and the NYLI Merger Arbitrage ETF (MNA).
And finally, there are more than $120 billion of crypto and crypto-related ETFs to choose from, with everything from bitcoin to blockchain set to benefit from the anticipated more favorable environment for crypto.
Industrial ETF Plays
For exposure to industrial companies, there is the Industrial Select Sector SPDR Fund (XLI), and iShares U.S. Industrials ETF (IYJ). A few more targeted plays on defense include the Global X Defense Tech ETF (SHLD) and legacy defense ETFs such as the Invesco Aerospace and Defense ETF (PPA).
Beyond Defense, another targeted thematic play is space. Again, there is an Elon Musk factor here, given that Musk is not only the CEO of Tesla, but also SpaceX. A couple of space ETFs to consider are the Procure Space ETF (UFO) and the actively managed ARK Space Exploration & Innovation ETF (ARKX). Both of these ETFs have delivered some pretty stellar returns over the last year, up 34.4% and 37.9%, respectively.
Small-caps
There are hundreds of small-cap ETFs in the VettaFi ETFdb universe. Small-caps have underperformed their large-cap peers in a rising rate environment over the last three years, but that headwind is abating.
One of last year’s performance leaders to consider is the Motley Fool Small-Cap Growth (TMFS), which is up 23.5% over the last year and has a growth tilt. Another interesting small-cap ETF offering is the First Trust Multi-Manager Small Cap Opportunities ETF (MMSC), which combines the stock-picking skills of Driehaus Capital Management and Stephens Investment Management. This combo delivered a 26.7% return over the last year.
AI & Energy Infrastructure
AI and energy infrastructure are a one-two-punch combination right now, as AI and its applications require a lot of energy. The Themes Generative AI ETF (WISE), the Global X Artificial Intelligence and Technology ETF (AIQ), and the ROBO Global Artificial Intelligence ETF (THNQ) are some top contenders among AI ETFs to consider.
On the energy side, midstream plays provide energy infrastructure exposure without the commodity pricing risk. One ETF to consider here is the Alerian Energy Infrastructure ETF (ENFR). The Pacer American Energy Independence ETF (USAI) is another obvious Trump 2.0 beneficiary, along with the UCSF Midstream Energy Income Fund (UMI).
Clean Energy Outliers
Finally, under the assumption that the death of clean energy has been greatly exaggerated, a few alternative energy ETFs have delivered outsized performance despite negative headwinds. At the top of the list is the TCW Transform Systems ETF (NETZ), followed by the SPDR MSCI USA Climate Paris Aligned ETF (NZUS). Both of these ETFs utilize a measured approach to achieving clean energy exposure that adapts over time.
Another clean energy outlier is nuclear, which is increasingly categorized as “clean,” given its low carbon footprint. Powering the list of Nuclear ETF performance is the Range Nuclear Renaissance ETF (NUKZ), which has been up 72.8% since its inception a little over a year ago.
Trump 2.0 vs. 1.0
Should Trump 1.0 offers any clues to what themes and sectors will outperform in a Trump 2.0 administration, a Trustnet study reveals the top three sectors between 2017 and 2021 during Trump’s first Presidency were:
- Technology and technology innovation (+126.9%)
- China/Greater China (92.0%)
- North American small-cap companies (66.4%)
Is China a Trump Trade?
China is not on my list of Trump 2.0 themes, but it is interesting to consider. While there are structural challenges facing China’s economy, the market may be overly pessimistic about Chinese companies, especially considering that they are trading at significant discounts. KraneShares ETFs offer many ways to play the Chinese market, including the broad market of KraneShares MSCI All China Index (KALL).
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VettaFi LLC (“VettaFi”) is the index provider for UFO, THNQ, and ENFR for which it receives an index licensing fee. However, UFO, THNQ, and ENFR are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of UFO, THNQ or ENFR.