Election Investing: Insights from the BMO ETFs Fall Forum

USA – Strategic (Medium/Long Term)

The most important strategic factor is the outcome of the U.S. elections – and that means both the presidential and the congressional. Recall, that in most cases the U.S. President must work with Congress to pass important legislation and bills. As an example, the President can outline spending plans, but they cannot introduce that legislation to the floor nor pass it unilaterally given that Congress has the “power of the purse”. True, the President can bypass Congressional approval by issuing Executive Orders (or EOs), but there are limitations – including legal ones that allow courts to overturn them, and revocations from future Presidents that curtail they’re staying power.

The below table provides six scenarios that play on the outcome for both the executive and congressional results. For the latter, a “red wave” outcome implies that Republicans take both the Senate and the House of Representatives, while a “blue wave” implies the Democrats do. A “split” outcome suggests that both Republicans and Democrats win one chamber each. The most likely scenarios involve a split congress outcome with either Harris/Trump. Under both, we see scope for ZUQ to potentially perform.

	Scenario 1	Scenario 2	Scenario 3	Scenario 4	Scenario 5	Scenario 6
President	Trump	Trump	Trump	Harris	Harris	Harris
Congress	Red Wave	Blue Wave	Split	Red Wave	Blue Wave	Split
Odds	24.8%	2.5%	25.7%	21.5%	2.2%	22.3%
Strategies	ZSML.F ZGLD	ZLU ZGLD	ZUQ	ZLU ZGLD	ZCLN ZSML	ZUQ
Rational	Onshoring + possible Volatility + Fed Encroachment	Gridlock + Possible Government Shutdown	Gridlock	Gridlock + Possible Government Shutdown	Democrat Agenda	Gridlock

Source: BMO Global Asset Management.

USA – Tactical (Short/Medium Term)

We still think there is additional room for the market to price in Federal Reserve easing – not least as recent non-farms payroll and JOLTS figures have been indications that the labour sector is struggling under restrictive monetary policy. The cleanest way to play the curve normalization theme is via ZTS – which should continue to perform as front-end cash U.S. yields head lower. Indeed, ZTS has been strongly correlated to the 2-10s U.S. curve over the past six months.

Strategic ETFs to Consider Under the Following Scenarios:

Split Congress:

ZUQ – BMO MSCI USA High Quality ETF

Blue Wave – Trump & Red Wave – Harris

Blue Wave – Harris:

Red Wave – Trump

Tactical Strategic ETFs to Consider:

ZTS – BMO Short-Term US Treasury Bond Index ETF

Canada – Strategic (Medium/Long Term)

The Bank of Canada (BoC) is now months into its easing cycle, and you can expect more interest rate cuts to come amidst the backdrop of slowing inflation. However, if you look beneath the surface, you can already see economic strains building, which imply that the bank may need to cut rates faster (via “non-standard sized” cuts of more than 25 basis points) and go deeper by eventually moving policy rates below the neutral range. Consider the latest quarterly GDP reading. True, Q2 GDP did top consensus estimates as well as the BoC’s forecast, but it was largely led by government spending on public sector wages. But the increased contribution here masks the waning momentum of household spending which is far more important to sustained economic growth in Canada. At this point, the market is pricing the Bank to end its easing cycle at the bottom end of its neutral range (2.25%-3.25%). However, the evidence suggests that debt servicing costs and mortgage refinancing risks are still restraining households from spending. That implies that the risks are tilted towards additional BoC rate cuts that need to be priced in – which is a strong endorsement for investors to consider increasing Canadian (CAD) fixed income exposure in portfolios (such as ZAG or ZGB).

Canada – Tactical (Short/Medium Term)

From a tactical perspective, we continue to like plays on a more normalized yield curve environment in Canada. Indeed, as more rate cuts get priced in, the CAD curve should “bull steepen” (meaning that front-end yields fall faster than the long-end) which is beneficial to bank business models. As such, we see further potential upside to ZEB from here. That should also benefit sector plays – including Utilities. Also, taxable accounts could benefit from exposure to ZDB – which offers a similar profile to ZAG (in terms of yield-to-maturity, duration, sector breakdown) but with a stronger “pull-to-par” effect given the discount. More benefits extracted via capital gains, as opposed to income, means better tax efficiency.

Strategic ETFs to Consider:

Tactical Strategic ETFs to Consider:

^*Mutual Fund series of the Exchange Traded Fund.

Disclaimers:

^*There maybe other scenarios not considered. The above list is not exhaustive of all potential outcomes.

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