Protect From Tax Reform ???Sell The News??? With These ETFs

The hearsay about tax reform has been pretty stretched. People kept buying on this possibility just after Trump was elected as President. And with chances of the passing of the tax reform being red-hot right now and shares soaring, the move seems to be priced in at the current level. Many analysts are now of the view that investors are buying on the rumor but may sell on the news.

The S&P 500-based fund SPY (NYSE:SPY) has added about 3.7% since mid-November when the House passed its tax overhaul bill. Dow Jones Industrial Average-based ETF DIA gained about 5.7% since the passing of House bill (as of Dec 19, 2017) and Nasdaq Composite advanced about 3.9% in the last one month (read: House Passes Tax Bill: Likely ETF Winners & Losers).

Not only this, SPY, DIA and QQQ surged about 18.5%, 24.6% and 31.3% in the last one year (as of Dec 19, 2017) of Trump trade or hopes of fiscal reflation and deregulation. This naturally raises a question on overvaluation and how much tax reform is priced in at the current level. Already, U.S. stocks dropped on Tuesday as the euphoria over the possibility of a tax revamp was clouded by “concern over its effect on years of monetary policy stimulus and the future of interest rates.”

Chief investment officer at BMO Private Bank believes, "the tax rate we’ve certainly priced in (in stocks)." Another market watcher Larry McDonald, founder of the Bear Traps Report noted that "clients have been literally positioning capital into tax reform plays since August, and even in the fall." McDonald also noted that a high level of volatility is expected in January when people will likely book profits and “a lot of this good news is priced in for tax reform."

What Lies Ahead in 2018?

Long-time market bull Jeremy Siegel, Wharton School finance professor, is also supporter of the similar view. Last month, Siegel indicated that the market is probably hitting the roof and that returns next year may be lower than 10%. Vanguard Group too projected medium-term returns of 4% to 6%. Liz Ann Sonders, senior vice president and chief investment strategist at The Charles Schwab Corporation (NYSE:SCHW) also believes that the “buying on the rumor and selling on the news” may be in the cards.

Added to this, there is rising rate concerns. Effects of tax reform (if materialized) and the Fed’s policy tightening may result in higher bond yields which may come in the way of stocks (read: What Do Yellen's Comments Mean for ETFs?).

ETF Picks

Against such a backdrop, both bulls and bears find their way into the market, making the job tough for investors to decide on their portfolio allocation. With the advent of many alternative ETFs, investors could easily protect their portfolio from the potential downside while continuing to invest in growing equities.

WisdomTree Dynamic Long/Short U.S. Equity Fund DYLS

The fund looks to track long and short equity positions. The long positions include large- and mid-cap U.S. stocks meeting their eligibility criteria including fundamental growth and value signals and volatility characteristics. The short positions take the largest 500 U.S. companies into consideration, designed to act as a market risk hedge (see all long/short ETFs here).

Reality Shares DIVCON Dividend Defender ETF DFND

The fund invests 75% of its portfolio in large-cap U.S. companies with the highest probability of raising their dividends within a year, based on their DIVCON dividend health scores.

First Trust Long/Short Equity Fund FTLS

The fund looks to provide investors with long-term total returns. It looks to pursue its investment objective by establishing long and short positions in a portfolio of equity securities. It can go long for 80–100% of the portfolio while short positions are restricted to up to 50%.

AGFiQ U.S. Market Neutral Momentum Fund MOM

The underlying index is a long/short market neutral index that is dollar-neutral. The fund provides exposure to the “momentum” factor by investing long in U.S. equities that have witnessed above-average total returns and shorting those securities that have had below-average total returns.

Hull Tactical US ETF HTUS

It is an actively managed ETF. The fund takes long and short positions in ETFs. The fund’s objective is to achieve long-term growth from investments in the U.S. equity and Treasury markets.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>