What the Fading of These 'Trump Trade' ETF Winners Means for the Financial Markets

Donald Trump’s dramatic return to the White House and a Republican-controlled Congress initially triggered sharp rallies in U.S. equities and other risk assets. However, just over a week later, the excitement appears to be cooling as investors question how sustainable these gains are. Concerns are growing about lofty stock valuations and uncertainty surrounding Trump’s policy agenda.

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Despite fading momentum in some areas, the so-called Trump trade continues to dominate headlines. As the president-elect begins assembling his cabinet, movements in U.S. stocks, bonds, the dollar, and bitcoin have become more measured.

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Troy Donohue, head of Americas portfolio trading at BTIG, explained, “Investors are now reassessing the election’s actual impact, recalibrating portfolios with appropriate sector and international allocations. Momentum will likely return gradually over the coming months and in a more distributed manner.”

Economic and Policy Implications

Investors are optimistic about Trump’s potential to boost the U.S. economy through tax cuts, tariff hikes, and reduced financial regulations. However, some of his policies, such as increased fiscal spending, could exacerbate the federal deficit and drive inflation higher. Rising inflation, in turn, could hurt the government debt market and push interest rates higher.

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ETF Performance: Winners and Challenges

Small-Cap ETFs

U.S. small-cap ETFs were significant beneficiaries of the initial post-election rally. The iShares Russell 2000 ETF (IWM) surged 8.8% last week, marking its best week in over four years. Optimism stemmed from expectations that Trump’s tax cuts and efforts to bring supply chains back to the U.S. would benefit domestically focused small businesses.

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However, this rally has since tapered off. The IWM has declined over 2.5% this week, while the Vanguard S&P Small-Cap 600 ETF (VIOO) dropped more than 2%, according to FactSet data.

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The slowdown in small-cap momentum is partly attributed to rising Treasury yields, which negatively impact smaller firms reliant on borrowing. The 10-year Treasury yield hovered near a four-month high this week as traders weighed inflation risks against the possibility of a 25-basis-point Federal Reserve rate cut in December.

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Cody Slach, senior managing director at Gateway Group, noted, “The bond market signals inflationary risks under Trump’s policies, including tariffs. The direction of the 10-year yield will influence small-cap performance moving forward.”

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Jan Szilagyi, CEO of Reflexivity, added perspective: “The selloff in small-cap stocks likely reflects noise rather than a meaningful change in sentiment toward Trump’s policies. Profit-taking is common, and rate-sensitive small caps could still benefit from a pro-growth administration and lower interest rates in the long run.”

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Big Tech and Tesla-Related ETFs

ETFs focused on technology and Tesla have also seen mixed results. The Roundhill Magnificent Seven ETF (MAGS), which includes giants like Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla, fell nearly 1% this week after soaring over 8% last week, according to FactSet.

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Tesla’s stock led the decline, dropping more than 3% this week after a 30% rally the previous week fueled by CEO Elon Musk’s perceived close ties to Trump. On Thursday alone, Tesla shares fell 5.8% amid concerns that the administration may eliminate EV tax credits.

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Despite short-term volatility, traders remain optimistic about Tesla’s potential under Trump. Leveraged ETFs like the Direxion Daily TSLA Bull 2X Shares ETF (TSLL) and GraniteShares 2X Long TSLA Daily ETF (TSLR) each gained over 60% last week, although they have since retraced some of those gains.

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Bitcoin and Financial Services ETFs

Unlike small-cap and tech funds, bitcoin-related ETFs have maintained their rally. Bitcoin hit a record $93,000 this week, and ETFs such as the Invesco Galaxy Bitcoin ETF (BTCO) and the Bitwise Bitcoin ETF Trust (BITB) climbed nearly 14%.

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Financial sector ETFs also continued to perform well. The Financial Select Sector SPDR Fund (XLF) rose nearly 1%, while the Invesco KBW Bank ETF (KBWB) gained 1.5%, and the SPDR S&P Regional Banking ETF (KRE) increased 1.3%, according to FactSet.

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New ETF Launches

• Janus Henderson Income ETF (JIII): Focused on fixed-income investments across U.S. and international debt securities, aiming for high relative income potential.
• iShares LifePath Target Date 2070 ETF (ITDJ): A retirement-focused fund designed to help investors build long-term savings.

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Conclusion

While the initial postelection euphoria has subsided, the long-term implications of Trump’s policies remain a focal point for investors. Small-cap, tech, and Tesla-focused ETFs have faced headwinds, but bitcoin and financial services funds continue to show resilience. As the market digests evolving policy developments, ETF performance will likely vary across sectors, offering opportunities and risks in equal measure.

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