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Winners & Loser of Trump's Tax Reform

Wall Street is going gaga over the likely benefits of Trump’s proposed tax reform (or reduction). Yet, there are some corners of the economy that are finding it tough to cheer. On Nov 2, House Republicans provided the layout for the biggest changes in the U.S. tax code in three decades.

U.S. Tax Reform Fund TAXR, which looks to offer capital gains by investing in market segments that the issuer thinks “will be impacted by the enactment of changes to the U.S. Tax Code,” gained more than 1% on Nov 2.

Below we highlight the likely winners and losers of the proposed Tax reform. The plan would reduce the corporate tax rate to 20% from 35% and modify the individual rates from seven brackets to four (read: GOP Nears Tax Reform: Buy These ETFs).

Winners

Financial

As per an article published on CNBC, a senior analyst at AB Bernstein noted that “large banks likely would see 2018 earnings per share jump by 12 to 20 percent, while midcaps would see growth of 15 to 25 percent.” Compared with the other sectors, the gain from tax reforms for large-cap banks would be in the 4% to 12% range while small-caps would see a boost of 7% to 17%, according to the article published on CNBC. This brings funds like PowerShares KBW Regional Bank Portfolio KBWR in the spotlight. KBWR was up 0.8% on Nov 2 (read: Powell to Lead Fed: Best ETF Strategies).

Large-Cap Growth

Most analysts say that big corporates will benefit from these tax cuts. First, a reduction from 35% to 20% and then “more favorable treatment of income earned abroad, which is either not taxed or taxed at an even lower rate than 20 percent” should prove great for large-cap growth ETFs like iShares Russell 1000 Growth ETF IWF. Notably, large-cap stocks have considerable foreign exposure and are thus beneficiaries of such bills. The fund IWF added about 0.1% on Nov 2.

Losers

Housing              

The new plan intends to rule out many prevalent deductions. The GOP-backed Tax Cuts and Jobs Act would cut the mortgage interest tax deduction for new home loans. “Mortgage interest deductions would be limited to new loans of no more than $500,000, down from the current $1 million. Deductions for second homes would no longer be allowed. Property tax deductions would be capped at $10,000,” as per a source.

So far, Americans resorted to this popular tax break to lower the purchase cost of home. The change may push up already-higher housing prices. As result, housing ETFs like SPDR S&P Homebuilders ETF XHB, iShares US Home Construction ETF ITB and PowerShares Dynamic Building & Construction ETF PKB fell 2.5%, 0.9% and 1.5% on Nov 2, respectively.

Medical

The bill also eyes annulling of medical expense deduction. Under the existing law, individuals who expend more than 10% of their income on medical expenses are permissible to subtract part of those costs from their taxes. But the proposed new bill would eliminate such deductions. Omitting the deduction will help Republicans with about $10 billion. Health Care Select Sector SPDR ETF XLV lost about 0.4% on Nov 2 (read: Healthcare ETFs Head to Head: XLV vs. VHT).

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SPDR-HLTH CR (XLV): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
PWRSH-KBW RBP (KBWR): ETF Research Reports
 
ISHARS-RS 1K GR (IWF): ETF Research Reports
 
US-TAX REFORM (TAXR): ETF Research Reports
 
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