November 8, 2012

State Street Makes Case for ETFs in Obama’s Second Term

REITS, munis, health care could benefit from infrastructure and Affordable Care Act spending

State Street Global Advisors, one of the largest providers of exchange traded funds, says that a number of targeted exchange traded funds (ETFs) could perform well in President Obama’s second term of office.

Targeted ETFs to consider in 2013 include real estate investment trusts (REITs), municipal bonds and health care, says David Mazza, State Street’s head of ETF investment strategy for the Americas, in an analyst note on Thursday.

Obama wants corporations to pay taxes of 28%, but seeks to give breaks to manufacturers Mazza argues. The president also proposes increasing income taxes for the highest two tax brackets to 36% from 33% and to 39.6% from 36%, he says.

“Even with the potential for higher taxes, it is unlikely that municipal bonds’ current favorable tax status will be altered, making the after-tax benefits of these securities appealing to investors in affected tax brackets,” Mazza writes.

In addition, he says, under the president’s proposals, the capital gains tax would increase to 20% on top earners while dividends would be taxed as ordinary income for individuals making more than $200,000 and couples making more than $250,000.

“This may decrease some of the appeal that dividend-paying companies have offered investors in this low yield environment. Thus, the appeal of REITs could increase relative to other high yielding equities,” Mazza writes. “Obama has made it clear that he would like to continue focusing on infrastructure spending and companies exposed to that industry may stand to benefit relative to what the Republican ticket was proposing.”

And with the Supreme Court decision upholding the Affordable Care Act, it’s unlikely the healthcare law will be challenged, “allowing investors to express their opinions on the healthcare sector with increased clarity,” Mazza says.

State Street Global manages more than 100 SPDR ETFs, including the first ETF launched in 1993, the SPDR S&P 500 (SPY).

According to State Street's latest ETF Snapshot, released Friday, U.S. ETF assets totaled $1.3 trillion as of Oct. 31, up 21.5% year to date.

In October, investors added $2.7 billion more to ETFs than they withdrew, as fixed income ETFs attracted $4.9 billion and emerging markets ETFs attracted $3.5 billion of inflows. Large cap ETFs saw outflows of $9.1 billion. Year to date, ETFs have attracted over $133 billion of inflows, up from $99.8 billion of inflows in YTD October 2011. In its latest ETF report, however, Morningstar points out that October's net inflows level is way down from September, when $33 billion poured in.

Mazza’s hot list of ETFs to consider includes:

–       SPDR Nuveen Barclays Short Term Municipal Bond ETF (SHM)

–       SPDR Nuveen Barclays Municipal Bond ETF (TFI)

–       SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)

–       SPDR Dow Jones REIT ETF (RWR)

–       SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)

–       Health Care Select Sector SPDR Fund (XLV)

–       SPDR S&P Health Care Services ETF (XHS)

Read 4 Post-Election Fiscal Cliff Scenarios at AdvisorOne.com.

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