ETFs Poised to Profit From the Election

If you’re like me, you’ll probably feel two emotions tomorrow: relief that you won’t be subjected to any more campaigning for a while, and then either joy or trepidation depending on the election’s result.

The polling gap between incumbent President Barack Obama and Republican challenger Mitt Romney has narrowed over the past week, and that means the outcome could be close. At this point, most polls show each candidate well within the margin of error. A number of pundits have even backed off their predictions as to who will prevail.

But if you’re brave enough–or confident enough–to make a call as to who will win, I’ve selected several exchange-traded funds (ETF) that could move higher based on who takes the White House.

The Challenger Prevails

In the event that Romney succeeds in edging out Obama, I expect bounces in Market Vectors Unconventional Oil & Gas ETF (NYSE: FRAK) and iShares Dow Jones Medical Device Index (NYSE: IHI).

Energy independence has been a cornerstone of Romney’s campaign, as he has pledged to do everything in his power to support the US energy industry. Romney says he would push for regulatory reform to speed up the exploration and production (E&P) of oil and gas resources, as well as the development and construction of infrastructure such as pipelines and export facilities.

Right now, most E&P work is being done in unconventional resource plays, such as the Bakken Shale formation, which require the use of hydraulic fracturing (fracking). In fact, Romney’s top energy policy adviser, Harold Hamm, is the CEO of Continental Resources (NYSE: CLR), an energy producer that makes extensive use of fracking.

But fracking has become extremely controversial because of concern that it could be damaging the environment. While companies engaged in fracking have said the mud and chemical mixtures used in the process are safe, there are reports that some fracking operations may have fouled nearby wells that supply local populations with drinking water.

As a result, the president has directed the Environmental Protection Agency to conduct a review of the fracking process, and regulation of the fracking industry has been tightening.

Romney has said he would roll back those regulations in order to stimulate US energy production, a move that would be favorable for Market Vectors Unconventional Oil & Gas ETF.

In a similar vein, Romney would likely prove an ally to the medical device industry.

The government must find new sources of revenue to help fund Obama’s sweeping overhaul of the American health care industry, and medical device makers found themselves shouldering part of that burden in the form of a new medical device tax.

The new tax amounts to 2.3 percent of gross sales and is expected to cost the industry about $20 billion over the next decade. Add in the effect of higher corporate taxes, which Obama also favors, and many analysts believe medical device makers could see a huge hit to profits, which could force a wave of industry consolidation.

Consistent with his theme that regulation and higher taxes hurt businesses, Romney has said he would make the repeal of the medical device tax a top priority in his broader effort to undo Obama’s health care legislation.

An Incumbent Victory

A second term for Obama could be promising for PowerShares Build America Bond (NYSE: BAB).

Build America Bonds (BAB) are taxable instruments created in 2009 to help localities finance infrastructure projects. Instead of offering tax-exempt status for these securities, the federal government subsidizes 35 percent of the bonds’ interest expense to help reduce municipalities’ borrowing costs.

BABs proved popular funding vehicles for localities. And they also caught on with investors because of their average yields, which range between 4 percent and 5 percent. As a result, the president has said he would like to see the program made permanent.

On the other hand, Republicans believe that BABs are symptomatic of failed Democratic stimulus initiatives and have said they would like to see the program eliminated. On a couple of occasions, Romney has said he agrees with that view and would toward ending the program.

Given the gulf between these two views, BABs have been trending downward as polling data has tightened. If the president ekes out a victory tomorrow, look for a rally in PowerShares Build America Bond.

Meanwhile, the expansion of broadband internet access has become one of Obama’s signature issues. In fact, on the campaign trail, this issue has figured prominently in speeches made by former President Bill Clinton, who’s currently stumping for Obama. Broadband access speeds in the US are just a quarter of those in South Korea, but are much more expensive. Additionally, broadband penetration rates are only about a third of those in many other countries. That’s despite that fact that the internet was essentially an American invention.

The president believes that puts us at a distinct disadvantage in terms of both business competitiveness and education. As such, he has proposed spending $18 billion to develop a coast-to-coast wireless broadband network to get 98 percent of the country connected to broadband within five years.

Obama hopes to pay for that program by auctioning unused spectrum, which he believes would raise about $28 billion dollars. Any funds not spent on the broadband initiative would then be applied toward our federal deficit.

Telecom companies would benefit both from the broadband initiative itself–they’re the leading providers of broadband access in the US and would be heavily involved in developing the network–and from gaining access to additional spectrum that would allow for a faster expansion of the 4G network. Capacity constraints have been the main issue holding back the nationwide rollout of 4G capability.

So an Obama victory could mean a jump in price for Vanguard Telecom Services ETF (NYSE: VOX).

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