Corporate earnings are going up.
Big news for investors came out of Washington in December, as Congress finally passed tax reform. The much-anticipated legislation delivered on one of President Donald Trump’s biggest campaign promises, which was one of the major reasons for investor optimism in 2017. The final law reducing business taxes from 35 to 21 percent clearly will boost corporate earnings. That bump in profitability alone isn’t the only reason to be optimistic, however. There remains plenty of opportunity for investors looking to play the tactical benefits of this landmark legislation — even after a big market rally already priced in better profits. Here are seven exchange-traded funds to buy now.
Vanguard Small Cap Growth ETF (VBK)
Corporate tax cuts won’t really benefit large multinational corporations if they pay the bulk of their tax bills overseas. But small U.S. companies typically do the lion’s share of their business at home. And, of course, a little bit of extra cash can go a long way toward helping these modest-size companies. That makes the VBK a great choice for investors. As is typical with a Vanguard fund, expenses are dirt cheap. Furthermore, the focus on growth-oriented companies means the gains from tax cuts have the potential to fuel even bigger growth for shareholders.
Expenses: 0.07 percent annually, or $7 on $10,000 invested
Consumer Discretionary Select Sector SPDR ETF (XLY)
From a consumer perspective, if the Republican plan actually delivers on putting more money into the pockets of Americans, that will naturally mean more spending. And what better way to benefit than the XLY? This fund holds names that are popular with American shoppers, including Amazon.com (AMZN), Home Depot (HD) and McDonald’s Corp. (MCD). If you think the tax cuts for corporations will trickle down and that the money will ultimately be spent instead of saved, this is the right investment for you to profit from that trend in 2018.
Expenses: 0.14 percent
SPDR S&P Regional Banking ETF (KRE)
A variation on that play would be that consumers decide to save more money, or deploy capital via new loans or investments. That trend would produce outsize benefits for smaller, regional bank stocks that make up the KRE. Not only would these small U.S. banks benefit themselves from tax cuts, but they could see an increase in deposits or activity such as mortgage refinancing and origination. And unlike the big banks that are globally influenced, regional banks like Huntington Bancshares (HBAN) in the Midwest or Florida’s BankUnited (BKU) will see a bigger impact across their balance sheets as a result.
Expenses: 0.35 percent
PowerShares Buyback Achievers Portfolio (PKW)
Of course, many investors think that corporate tax reform will largely just benefit corporations. If that’s the case, then you want to bias your investments toward companies that use that extra money to benefit shareholders. That’s what the PKW does. This ETF invests in corporations that have bought back at least 5 percent of their outstanding shares over the last 12 months. With more cash, you can be sure they will do the same in 2018 — and thus decrease the supply of stock on the market to drive up performance in the new year.
Expenses: 0.63 percent
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
Rather than buy back shares, another option for corporations with more cash is to deliver the money directly back to shareholders. U.S. companies with a strong history of dividend growth are the most likely to do so, as they have already demonstrated their commitment to higher payouts before tax reform was even passed. The DGRW is not simply backward-looking like many dividend growth funds, however, and instead analyzes the prospect of future profits and long-term growth expectations when it chooses components. When you take stocks like this and give them more cash thanks to tax cuts, it’s a no-brainer that they will share more of that cash with shareholders.
Expenses: 0.28 percent
Pacer U.S. Cash Cows 100 ETF (COWZ)
Yet another option for capitalizing on corporate tax cuts is to concentrate on U.S.-based companies that typically see big free cash flow. These tend to be well-run companies that have shown they know how to succeed. Metrics like dividends or even earnings per share can be false indicators of strength, but you can tune out the noise by looking at the amount of actual cash a company generates. Sure, the methodology of COWZ leaves out companies like Amazon that spend heavily on expansion. But the focus on high-quality companies that manage their business well when taxes are high could pay off even more as rates decline under the GOP plan.
Expenses: 0.49 percent
EventShares US Tax Reform Fund (TAXR)
If you don’t want to unpack each of these trends yourself, or if you’d rather mash parts of them up together, then consider the recently launched TAXR. This ETF seeks to provide exposure to companies it thinks will benefit most, including U.S. exporters that can price products more competitively as well as corporations that can spend more on expansion plans, among other strategies. This fund is an interesting marketing ploy to chase the headlines directly, but it hasn’t seemed to pan out with just $15 million in total assets so far. Perhaps now that the tax bill is actually law, Event Shares will see more money head its way.
Expenses: 0.85 percent
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