ETF investors should 'ignore the noise and stay the course' as US election looms large

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In the first of a new series for ETF Express, Beverly Chandler garners the opinions of the great and the good in the ETF world on investing in ETFs during the pre-US Presidential election period.

In this unprecedented year when nothing has turned out quite like it was expected to, the approach of the US Presidential election on 3 November represents another huge challenge to markets that have experienced such volatility over the year.

Michael Loukas, CEO and Principal of TrueMark Investments, with a range of thematic ETFs including a structured outcome ETF, says: “Debate, hyperbole and spirited emotions are all hallmarks of US Presidential elections. However, from an investment perspective, the star of the show is uncertainty.”

Loukas believes that the lack of visibility surrounding future economic policy and how it will affect particular asset classes leads to a myriad of offensive and defensive positioning strategies that cause daily shifts in the market, driving volatility higher. 

“This only increases as November approaches,” he says. “A hotly contested White House and Senate, a Supreme Court nomination process, and the lingering effects of the Covid pandemic, will undoubtedly make uncertainty the only constant for the foreseeable future.”

Loukas believes that ETF investors will need to buckle their seatbelts and stay committed to their investment goals and portfolio construction. “Long-term investors are best suited by ignoring the noise and staying the course. Those that may need liquidity or are volatility averse, should absolutely consider heavier usage of volatility management tools.  In 2020, a year when nothing has gone as expected, election uncertainty seems destined to last well into the new year."     

Taking a sectoral view on what might do well in the widely forecast uncertain markets, Kevin Tracy, Senior Credit Research Analyst at Loomis Sayles comments on the likely effect of the upcoming election on the healthcare and pharmaceutical sectors, which have shown sensitivity to the political landscape.

He writes that Democratic presidential candidate Joe Biden has publicly endorsed several progressive healthcare policies including expanding the Affordable Care Act, enticing holdout states (those that have not expanded Medicaid coverage under the ACA) to expand Medicaid coverage with 100 per cent federal matching in the first three years of expansion. He writes that this also involves functional reform to strengthen the ACA by reversing Trump administration policies that dampened Medicaid enrolment and exchange outreach.

This matters, Tracy says, because expanding Medicaid provides additional coverage for the uninsured. Eleven states still have not expanded, including highly populated states like Florida and Texas.  

The industry impacts of this happening is that hospitals would benefit from expanded insurance coverage (increased reimbursement) and government-focused managed care organisations would gain scale and increased negotiating power. He also believes the likelihood of this happening is high.

The Public Insurance Option, with the Federal government entering the business of providing insurance coverage for any American who wishes to participate, is also in play, Tracy writes. 

“These plans would compete directly with commercial and employer-sponsored plans…proposals are calling for the public insurance option to provide reimbursement rates that closely resemble those of Medicare fee for service. This could cause significant financial hardships across the hospital and provider space.

“I believe this could be a meaningful negative for hospitals, which could experience a large mix shift from higher-margin commercial payers toward thinner-margin public plans with rates tied to Medicare.”

However, Tracy believes that the likelihood of this happening is low with hospital lobbying groups spearheading strong opposition. A further proposal is to lower the Medicare eligibility age to 60, as people in the 60 to 65 demographic are heavy users of healthcare services. Here, again Tracy believes that the likelihood is low as few policymakers would want to add to the financial strains placed on hospitals, particularly at this time.

The final point from Tracy is drug price legislation, with a proposal to introduce legislation or regulations designed to reduce drug prices and here the policy has bipartisan support. However again, here Tracy believes the likelihood is low. “However, I believe drug price policy proposals are likely regardless of the election outcome. Headline risk associated with these proposals has the potential to pressure corporate bond spreads for exposed companies,” Tracy writes. “Even without meaningful change, headlines could drive spreads wider.”

Nawan Butt, Portfolio Manager of the CBDX medical cannabis ETF, has also written on the likely effects of the upcoming US election, stating: “The upcoming US election has started nation-wide conversations around the legalisation of cannabis, both recreational and medicinal. With the COVID-19 pandemic continuing, demand and use of medical cannabis has increased in the US.”

The Medical Cannabis and Wellness Equity Index (NTR) was up 7.32 per cent in August, -13.48 per cent over the last 12 months. Butt says some clear patterns for the Cannabis sector have taken hold a few months into the pandemic, which are driving recent returns for investors.  

“Firstly, the industry has experienced growth in CBD and adult use cannabis sales as consumers look to alleviate pandemic related anxiety and stress. Second, the growth of tele-medicine is beating the stigma of cannabis as more patients become comfortable in a virtual setting and set patient growth records in many states in the US and countries around the world.”

Lastly, Nawan Butt believes the emergence of institutional investors in the space is lifting valuation multiples, especially for ancillary companies which are experiencing parallel growth to cannabis companies themselves.

“We have seen strong returns for investors in the Cannabis sector in recent weeks, and the second half of the year has been nicely setup for some major catalysts on a macro and company specific level. On a macro basis, the key market of the US becomes a talking point of the 2020 elections. We now have direction in terms of which Democrats will be addressing cannabis reform ahead of the elections and believe this could cause significant momentum in the space.

“As we inch closer to US elections in November 2020, cannabis is starting to become a topic of discussion for the Democrat party,” he says.

BlackRock has also commented on the upcoming election, describing it as ‘consequential’.

“The US election is taking place against a historic backdrop of a pandemic, recession and domestic strife. The outcome could have significant implications for key policy areas:  fiscal stimulus, public investment, taxation, regulation and foreign affairs. It also has the potential to supercharge structural trends such as an increased policy and market focus on sustainability.”

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Beverly Chandler
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