Investors pull back on 'blue wave' ETF bets as election outcome remains unclear

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Shares of some exchange-traded funds viewed as favorably positioned to benefit from a broad Democratic U.S. election victory came under pressure on Wednesday, as the race turned out to be closer than expected with no clear winner.

Clean energy ETFs were among the hardest hit in a wider market rally, along with those tracking marijuana stocks, financials and small companies. The sell-off reflected bets that Democrats would have a harder time pushing through key policies and large fiscal stimulus unless they win both the presidency and the Senate.

"There is no major shift going on but there is a slight 'blue wave' unwind," said Anita Rausch, head of capital markets for WisdomTree Investments.

Either President Donald Trump or his Democratic rival Joe Biden could still win, but investors and betting markets are wagering on a Biden victory with the Republican Party keeping a hold of the Senate.

Shares of the Invesco Solar ETF (NYSE: TAN), which had risen about 30% over the last two months, led the way lower among clean energy ETFs, falling 2.5% while the S&P 500 index rallied 3.2%.

Seeking to allay concerns that his plan to fight climate change would harm the economy, Biden had promised a "clean energy revolution that creates millions of unionized middle-class jobs" if he is elected.

The sell-off in clean energy shares may reflect reduced clarity on whether the election outcome would favor environmentally friendly policies that would benefit the sector, said Todd Rosenbluth, CFRA's head of ETF and mutual fund research.

Some economically sensitive areas such as financials and small caps, seen as benefiting from a larger stimulus package, also struggled. The small-cap stock market index <.RUT> was up 0.9% and the Financial Select Sector SPDR Fund (NYSE: XLF) was barely positive on the day.

Marijuana stocks, which some had expected to benefit from decriminalization at the federal level, were also down, with the cannabis-focused ETFMG Alternative Harvest ETF off 1.7%.

ORDERLY TRADING

Some analysts were expecting a broad Democratic victory to spark broad selling in ETFs focused on technology and other areas sensitive to Biden's proposed tax increases.

On Wednesday, tech stocks led Wall Street higher, with the Invesco QQQ ETF (NASDAQ: QQQ) gaining 4.6%.

"There was a potential, if there had been a decisive victory, for some potential selling of equities, specifically ETFs, ultimately with the expectation that there might be a capital gains tax increase if there was a 'blue wave,'" said Ben Slavin, global head of ETFs and asset servicing at BNY Mellon.

With broad-market volatility subdued, trading in ETFs was for the most part orderly, market watchers said. The ETF market had weathered big swings this year with little evidence of dislocations.

"I don't see any impact on the infrastructure or the ETF ecosystem ... related to the election," Slavin said.

(Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang)

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