Are ‘Trump Trade’ ETFs Overbought?

Assets and sectors expected to benefit from a second Trump term, collectively known as the “Trump Trade,” may be reaching overbought conditions.

The largest spot bitcoin exchange-traded fund, the iShares Bitcoin Trust ETF (IBIT), has rocketed 35%, while small caps and financials are up 8% and 9% since Nov. 5, as measured by the iShares Russell 2000 ETF (IWM) and the Financial Select Sector SPDR Fund (XLF), respectively.

While a crypto-friendly Trump administration prepares to take over the White House in 2025, many analysts are forecasting that bitcoin’s price will reach 100,000 by the end of this year. At 68,000 just a few weeks ago, such a high level did not seem achievable so soon, but BTC touched 93,000 Wednesday afternoon, just under 8% gain away from the six-figure mark.

A deregulatory Trump administration is seen as a potential benefit for the financials sector while a pro-business administration and its promotion of tax cuts may lift productivity and profit margins for U.S. corporations, especially small caps.

Whether these Trump Trade ETFs have more room to run higher in the short term may depend more on market sentiment than fundamentals, which are yet to be accurately quantified.

A combination of tax cuts and deregulation can significantly impact prices for the IBIT, XLF, and IWM ETFs, or cryptocurrency, financials, and small caps, respectively, by creating a favorable investment environment that encourages growth and risk-taking:

• Cryptocurrencies: Reduced taxes and regulatory constraints may attract more retail and institutional investors to the cryptocurrency market. Lower taxes on capital gains could boost demand as investors realize a greater return on investments, while reduced regulatory barriers may spur innovation and adoption of blockchain technology, driving up cryptocurrency prices.

• Financial stocks: Deregulation and tax cuts can directly benefit financial institutions by lowering compliance costs and enhancing profitability, enabling banks and financial firms to engage in riskier but potentially more profitable activities. With tax savings, companies have more capital to reinvest, potentially increasing dividends or stock buybacks, which can drive up financial stock prices.

• Small-cap stocks: Small-cap companies often benefit from tax cuts, as many of these firms operate with tighter budgets and higher growth ambitions compared to large corporations. Lower taxes and fewer regulations can increase their net income and operational flexibility, allowing them to reinvest earnings into expansion. This environment can make small caps more attractive to investors seeking growth, pushing their stock prices higher as risk appetite increases.

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