How Will Financial ETFs Be Affected If Hillary Clinton Wins

Despite claims that Clinton is cozy with the investment banking elite, her policies reflect an anything-but-cozy relationship.

For investors in the financial sector, a Clinton presidency could signal wide-sweeping changes to the sector, and ultimately craft a very different and very difficult operating environment. For the financial stocks and exchange-traded funds (ETFs) that track them, a Clinton victory could end up to be a major hassle indeed.

You can make all the jokes you want about Clinton raking in money for speaking engagements at Wall Street’s top investment banks, but, in reality, that relationship is only skin deep. Clinton’s pending financial policies hit Wall Street right in the pocketbook.

The overall gist of her plans focus on increasing regulation in the financial sector in order to protect Main Street America, which includes adding additional provisions to the landmark Dodd-Frank Act. Clinton has pledged to reinforce the various stop gates of the bill that prevent a bank from doing certain kinds of trading or lending, holding certain assets, etc. Banks have lobbied to have many of these provisions removed or reduced, and Clinton has vowed to veto such measures.

In addition, Clinton has pledged to strengthen the so-called Volcker Rule of the Dodd-Frank bill. The provision prohibits taxpayer-backed banks from making big bets with their own – or their depositor’s – money. This removes proprietary trading from the equation. Clinton has vowed to make trading using federally insured deposits a thing of the past by closing loopholes in the Volcker Rule.

Also under her Dodd-Frank policies, Clinton has vowed to remove “Too Big to Fail” from the financial lexicon by allowing regulators to break up financial institutions when they pose a systematic risk to the economy. In addition to that, Clinton is looking to impose a risk fee on the largest financial institutions, based on their size, asset bases and activities.

Finally, Clinton has pledged increased financial oversight via various regulatory bodies, such as the Commodities Futures Trading Commission (CFTC) and Consumer Financial Protection Bureau (CFPB). This oversight includes having the ability to send bankers to jail for breaking the rules and larger, more damaging fines.

Given how much oversight Clinton is proposing on the financial sector under her watch, the various major stocks in the sector could suffer – and that could trickle down to the various ETFs that cover them. For investors looking to short the financial stocks on a Clinton win, the Direxion Daily Financial Bear 3x Shares (FAZ A-) could be one of the best choices.

FAZ uses various swaps and derivatives to provide 3 times the daily return of the financial sector. It essentially shorts the major U.S. financial stocks. While the daily reset can provide plenty of volatility, if Clinton is truly successful, the FAZ should sink for a long time. While risky, FAZ could be a big hit for investors under a Hillary win.

However, given how risky shorting can be, investors may just want to avoid or underweight some of the biggest financial ETFs if Clinton is successful at securing the presidency.

A prime pick to avoid is the iShares U.S. Financials ETF (IYF B+). IYF tracks the Dow Jones U.S. Financials Index – the index of all the major U.S. banks, insurers and credit card companies. Here is where you’re getting exposure to all the big boys that Clinton is directly targeting. Any of her policies or the Dodd-Frank-strengthening efforts are going to hit these stocks right in the profits. That could have the ETF stagnating over the term of her presidency. And with most of Clinton’s ire targeted towards banks, the SPDR S&P Bank ETF (KBE A) could also be a major loser.

As could the PowerShares Global Listed Private Equity Portfolio ETF (PSP B+) and VanEck Vectors BDC Income ETF (BIZD B-). Clinton’s plans involve taking on the shadow banking system and the use of dark pools – the favorite stomping grounds of some hedge funds. She has also looked into reducing high-frequency trading through the use of higher taxes. PSP bets on various private equity and hedge managers that could suffer under her rules, while some of these rules could be applied to the various development companies in BIZD.

However, it may not be all doom and gloom for the financial sector. Strengthening Main Street means smaller banks could get a real boost. As Wall Street potentially suffers at the hands of Clinton’s policies, small community banks would continue to do what they’ve always done: take in deposits, make loans, provide guidance and strengthen communities. And all of this far from the effects of the Dodd-Frank. These smaller banks simply don’t trade derivatives or invest in Malaysian infrastructure project bonds. The First Trust NASDAQ ABA Community Bank Index Fund (QABA B) bets on 147 of these smaller community banks. Given their traditional banking focus, they should thrive under a Clinton presidency.

In the end, Clinton’s policies towards financial stocks could be a major shock to the industry. As many investors and people think she’s “buddy-buddy” with Wall Street, her plans to increase regulation could hit the sector – and the ETFs that track it – right in the teeth.