By Jack Hough
Now should be an excellent time to be a MAGA investor. President Donald Trump's favorite acronym is also the ticker symbol for Point Bridge America First, an exchange-traded fund that promises exposure to "companies that align with your Republican political beliefs."
In November, a red wave put Republicans in control of the House, Senate, and White House. Yet an investor who correctly predicted that outcome and bought shares in the MAGA ETF the day before the election has since made just 1.7%. That is well short of the S&P 500 index's return of 4.5% over the same stretch. It's even further behind the 6.3% return for the Democratic Large Cap Core ETF, or DEMZ, which favors "companies that have made over 75% of their political contributions to Democratic causes and candidates."
Blame industry weightings, not ideology. MAGA has plenty of oil and chemical stocks, which are down amid high inventories and economic concerns, plus home builders, which have been hit by a drop in housing starts. DEMZ has more in big tech, entertainment, and high-fashion companies that have produced healthy double-digit returns. A special shout-out to Paychex and Kimberly-Clark, which somehow managed to earn a spot on both ETFs. A Nov. 4 investment split equally between these stocks -- call it BPZN, or the Bipartisan Fictitious ETF -- would have made 10%.
Consider these points as a friendly reminder that using politics to drive investment decisions is folly. Nonetheless, it could be a mistake for today's investor to ignore the role of government altogether. Since the Covid-19 pandemic, the government's share of the U.S. economy has been between 35% and 40%, points out Mark Haefele, chief investment officer for global wealth management at UBS, in a new book titled The New Rules of Investing: Essential Wealth Strategies for Turbulent Times. The Biden administration's Chips Act corresponded with a run-up for semiconductor stocks, just as the Inflation Reduction Act did with infrastructure stocks, Haefele notes. "Investing in free markets is out, " he writes. "Buying what the government is buying is in."
Since the book was published in January, the stock market tumbled on President Trump's announcement of startling worldwide tariff rates, then rebounded following a partial pause amid trade negotiations. Big companies are running into messaging risks. The president berated Mattel and Walmart after they discussed tariff-related price increases with investors, and Apple for talking about moving iPhone production to India rather than the U.S. For investors, this could mean stock price hits or customer responses that are impossible to predict.
Bonds haven't been a reliable hedge against stock declines. Long-dated Treasuries have fallen in price, pushing yields higher, as Congress shapes a budget bill that appears likely to expand deficits beyond already high levels.
There is plenty of government influence, in other words. But the market effects are changing so quickly that it's difficult to imagine an investor getting ahead of it all. Anyhow, isn't that the job of company managers in an S&P 500 index fund?
"It's overthinking of it to say, 'Well, I want to get in front of this and predict what the Trump administration's agenda is,' " Haefele recently told Barron's. "I'm saying buy what the government is buying, like what they're actually paying money for. What's written into actual law."
Invest by Theme?
Haefele recommends investing based on three themes that are likely to prove more durable than others because they relate to societal challenges that are spurring spending by governments around the world: digitalization, including artificial intelligence; decarbonization, including alternative energy production; and demographics, including providing healthcare for the elderly. He recommends a top-down investment approach that prioritizes these themes rather than starting with standard country and industry weightings.
Asset allocation, not stock-picking, will determine 80% of returns, says Haefele, and he isn't shy about advocating for his firm's services. "If you want to devote your life to picking stocks and go to bed thinking about them, wake up thinking about them...I don't recommend this for a life," he says. "This is what we do."
Joseph Davis, global head of Vanguard's investment strategy group, agrees that the U.S. government could exert more influence than usual on investor returns from here. The two most important trends for the overall market, he says, will be artificial intelligence and federal deficits: "It's going to be a tug of war that's going to dwarf all other factors." Davis has written about this in a new book called Coming Into View: How AI and Other Megatrends Will Shape Your Investments.
AI could be as transformative as the combustion engine or personal computer, Davis says. And the biggest gains from here could accrue to AI users outside the technology sector. But an overall boost to growth isn't a sure thing, and the timing is uncertain. In an optimistic scenario, AI raises productivity and profits, which helps hold interest rates down while lifting the stock market.
"It doesn't mean the deficit issue went away," he says. "It's just more of a kick the can. That can last seven or 10 years." The other possibility is what Davis calls deficit-dominant. AI turns out to be more like social media -- widely used, but not transformative for growth. Congress fails to meaningfully address the deficit, and interest rates move materially higher. "The stock market isn't prepared for that outcome," says Davis.
Deficit scolds have been warning about bad consequences for overborrowing for decades, and the consequences haven't hit. There's a reason for that. Globalization brought the savings from cheap overseas labor to U.S. consumers, which held down price growth, allowing interest rates to move ever lower. That fueled bull markets in stocks, bonds, housing, collectibles -- just about everything. Periodic market panics were met with powerful interventions -- the Federal Reserve lowering interest rates, or the federal government unleashing stimulus spending. Investors have come to rely on these backstops on returns, calling them the Fed put or the Trump put -- a reference to options bets that pay off when prices fall.
Facing the New Reality
There has been a sea change in trade. Pandemic shortages spurred companies to rethink long supply chains. And President Trump's message of the U.S. being taken advantage of on trade has resonated with middle-income voters.
Put aside whether you think tariffs are the right answer. Globalization can no longer be counted on to depress price growth. Persistent inflation could leave the Fed with less room to lower interest rates in a pinch. The same goes for fiscal stimulus, with bond investors already balking at government overspending. Put it all together, and the Fed and Trump puts might not pack the same punch. The financial markets now might be more likely to exercise a put on policymakers than the other way around. It was simultaneous declines in stocks and Treasuries, after all, that prompted President Trump to announce the current tariff delay.
Investors should be ready for volatility, and perhaps lower returns. If we think of all that excess government spending as a credit-card advance on economic growth, any effort to hold the line on advances, to say nothing of paying them down, could subtract from growth.
So far, the outlook for investors isn't dire. Vanguard's Davis expects U.S. stock returns over the next decade to average 6% a year before inflation -- decent, but not the 10% that investors have become accustomed to. He recommends at least 20% in overseas stocks. (For more on investing outside the U.S., see " Your Portfolio May Need Some International Flair. Here's How to Add It.")
This has been unpopular advice for decades, as the U.S. technology sector has generated world-beating returns, but ex-U.S. markets have outperformed the S&P 500 by 13 percentage points so far this year and remain relatively cheap. Plus, overseas stocks double as a currency hedge. To increase your exposure overseas, one option is Vanguard FTSE All-World Ex-US ETF.
Smart Diversification
Gold and Bitcoin are hitting new highs in what J.P. Morgan has called a dollar debasement trade. Davis says true currency debasement is unlikely, because the world lacks a viable alternative to the U.S. dollar and the Fed can act to fight inflation. But bonds could experience more price volatility, which cuts into their ability to serve as a hedge for stocks. The plus side to this is that yields are higher. Russ Brownback, global head of macro positioning for fixed income at BlackRock, says we're in a golden age for income.
Collecting a 5% yield on a 30-year Treasury will offer little comfort in the event that bond prices decline by twice that much or more. But short-term Treasury bills are paying 4.3%, with much lower potential for price volatility. Investors can also add a dash of exposure to high-yield corporate bonds to boost income while holding durations down to manage interest-rate risk. The iShares 0-5 Year High Yield Corporate Bond ETF has a gold rating from Morningstar and yields 7.4%, with an average effective duration of just over two years.
Best advice: Stick with stocks and bonds, but don't count on lavish returns. To hedge against government bloat, keep bonds fairly short-term and diversify stocks overseas. Decide for yourself whether to seek increased exposure to so-called megatrends, including ones the government is spending on, but if you do, choose carefully.
Just 4% of stocks have accounted for half of excess returns over cash during the past 100 years, says Vanguard's Davis. "Most people aren't smart enough to pick the 4%," he says. "That's why indexing is powerful."
And with best wishes for both MAGA and DEMZ shareholders, it's probably best to skip the politics-based investing altogether.
Write to Jack Hough at jack.hough@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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June 06, 2025 01:00 ET (05:00 GMT)
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