Preparing Your Portfolio for Midterm Elections

Recent polls suggest the midterm elections will result in a split Congress. Democrats are slightly favored to retain control of the Senate and Republicans have a slightly larger chance of taking back the House, according to FiveThirtyEight.¹ Of course, if we’ve learned anything over the past few years, it’s that polling predictions are imperfect.

To help prepare portfolios for any outcome, we consider how energy policy, defense spending, tax policy, and infrastructure programs could be impacted based on whether the Democrats or Republicans control Congress — and suggest SPDR® ETFs that align with each potential outcome.

Energy Policy: Build Back Better vs. Support for Legacy Energy

Democrats maintaining control of Congress would signal support for President Biden’s “Build Back Better” plan. Look for legislation that features clean energy refundable tax credits, investment in clean energy and subsidies, as well as broad-based legislation to phase out of fossil fuels.

Republican gains, whether in the House or both chambers, would likely mean an end to Biden’s agenda and would curtail additional climate investments. Strong support for the legacy energy sector likely will be a main focus if the GOP has the majority in both chambers.

Democrat

• The SPDR® S&P Kensho Clean Power ETF [CNRG], a modified equal weighted exposure focused on firms innovating with clean power generation, including wind, solar, and geothermals
• The SPDR® S&P 500 Fossil Fuel Reserves Free ETF [SPYX] for broader-based climate centric portfolios

Republican

• The Energy Select Sector SPDR® Fund [XLE], a market-cap weighted exposure of the Energy sector in the S&P 500
• The SPDR® S&P Oil & Gas Exploration & Production ETF [XOP], a modified equal weighted exposure focused on oil & gas production firms
• The SPDR® S&P Oil & Gas Equipment & Services ETF [XES], a modified equal weighted exposure focused on oil & gas servicers, including refiners

Defense Spending: Increases with Bipartisan Support

The ongoing Russia-Ukraine War, derivative impacts from the Nord Stream pipeline leak, and rising tensions around the Taiwan Strait all reinforce bipartisan support for increasing defense spending.

In July, 180 Democrats and 149 Republicans in the House of Representatives joined forces to approve $37 billion more in defense spending than President Biden’s $69 billion request for fiscal year 2023.² The sum total represents 9.8% more than the 2021 enacted level.³

In all midterm election scenarios, both traditional and cyber defense measures will be on the table as far as spending bills are concerned, especially given the focus on the extension of the R&D tax credit.

Democrat and Republican

• The SPDR® S&P® Aerospace & Defense ETF [XAR], a modified equal weighted exposure focused on the defense industry
• The SPDR® S&P Kensho Future Security ETF [FITE], a modified equal weighted exposure focused on firms innovating with defense industries, including cyber security, drones, and border protection

Tax Policy: Political Parties at Opposite Ends of Spectrum

If Democrats retain control of Congress, corporate and individual tax increases are more likely. Also, the 1% buyback tax may increase further, as a way to pay for other initiatives like clean energy. As a result, firms that put a priority on dividends may start to be more of a focus than those that return value to shareholders via buybacks.

A Republican-controlled Congress likely will reject any significant corporate or individual tax increases put forth by Congressional Democrats. If that happens, it would mean no tax increase on multi-national income or OECD global tax.

Under Republicans, it would also be more likely that popular tax breaks get extended, or some provisions in the Inflation Reduction Act get reversed. As a result, sectors with large amounts of foreign income —,Technology/Semiconductors,— could be favored over domestic low-tax sectors like Real Estate).

Democrat

• The SPDR® Dow Jones® REIT ETF [RWR], an all-cap market cap weighted exposure focused on REITs
• The SPDR® Portfolio S&P 500® High Dividend ETF [SPYD], an equal weighted exposure of the 80 highest dividend payers in the S&P 500 Index

Republican

• The SPDR® S&P Semiconductor [XSD], a modified equal weighted exposure focused on semiconductor firms
• The SPDR® NYSE Technology ETF [XNTK], a modified equal weighted exposure of leading technology-related companies

Infrastructure Programs: Bipartisan Support with Different Emphasis

The Bipartisan Infrastructure Law (BIL), signed in November 2021, provide $550 billion of new federal investments over five years. Once again, there is likely to be bipartisan support for further infrastructure spending.

Based on the securing of broadband and water funding in the BIL, Democrats likely would focus on sustainable and intelligent infrastructure, whereas Republicans likely would place a greater emphasis on roads, bridges, and ports.

Democrat

• The SPDR® S&P Kensho Intelligent Structures ETF [SIMS], an exposure focused on firms driving innovation behind intelligent infrastructure, including smart buildings, smart power grids, and intelligent water infrastructure

Republican

• The SPDR® S&P Global Infrastructure ETF [GII], a fund focused on the 75 largest transportation, utilities, and energy infrastructure firms

Do Midterms Have You Gearing Up for Gridlock?

A split Congress would likely mean legislative gridlock and political theatrics around government shutdowns, debt ceiling limits, and presidential appointees.

Tightening by the Federal Reserve, persistent inflation, increased geopolitical risks, and slowing global economic and corporate growth will continue to dominate headlines and influence voters leading up to election day.

For help navigating these challenges and near-term sentiment shifts, visit our market trends page for timely insights.