The investment strategy that rode the wave of Donald Trump’s anticipated second presidential term is now facing significant headwinds, turning what was once a promising ‘Trump Trade’ into a market loser for many investors. What began as a rush by both amateur and professional traders to identify stocks poised to benefit from his aggressive economic agenda has, in recent months, seen a sharp reversal.
Trump Trade Index Slumps Amid Shifting Market Dynamics
Ned Davis Research’s proprietary Trump Trade Index, a gauge comprising a dozen exchange-traded funds (ETFs) designed to capitalize on potential White House policies related to homebuilding, defense spending, and the re-shoring of manufacturing, has experienced a notable downturn. Since May, the index has fallen approximately 16%, a stark contrast to its strong performance earlier in the year when it outpaced the S&P 500 Index. Several ETFs within this benchmark are now trading in negative territory for the year.
This breakdown in the Trump Trade’s momentum is largely attributed by Ned Davis Research to the escalating geopolitical tensions involving Iran. According to a recent report from the firm, the conflict has triggered a rise in energy prices, inflation expectations, interest rates, and the valuation of the U.S. dollar. Pat Tschosik, chief thematic strategist at Ned Davis Research, highlighted the persistent inflationary pressures, stating, ‘All this is tied to the Iran war and inflation. Let’s just go three months without some sort of inflation shock, right? Between some sort of tariff, or war, or supply chain disruption, could we just go three months without some sort of supply shock?’
ETFs That Fueled Early Gains Now Face Declines
The current slide follows a period where many Trump Trade-aligned investments posted impressive double-digit percentage gains through the first quarter of the year. Funds such as the VanEck Rare Earth and Strategic Metals ETF, the Global X Uranium ETF, and the Global X Defense Tech ETF had all reached gains of at least 20% at various points in the first quarter. While some of these gains were sustained into the second quarter, they have since reversed, pushing these ETFs into negative territory.
Matt Gertken, chief geopolitical strategist at BCA Research Inc., noted that investors who bet on the success of Trump’s economic agenda have encountered several disappointments this year. These include the adverse economic effects of the Iran conflict, such as higher inflation that has dampened manufacturing and housing investment. Furthermore, the strong performance of artificial intelligence (AI) investing themes has overshadowed specific stocks whose fortunes are more closely tied to the broader economic cycle.
‘Investors who bet on AI and against traditional cyclical sectors outperformed, while those who saw Trump as a champion of U.S. manufacturing, heavy industry and working-class consumption suffered,’ Gertken explained.
Investor Outflows Signal Shifting Sentiment
Evidence of investors abandoning these trades is also visible in fund flows. The Truth Social God Bless America ETF, trading under the ticker YALL, has experienced consistent outflows every month since the conflict with Iran began. This ETF, which offers significant exposure to energy, industrials, and financials, has seen its value decline by more than 4% this year, while the broader S&P 500 has climbed approximately 8%.
Notably, this fund does not hold shares in the owner of Truth Social, Trump Media & Technology Group Corp. This company’s stock has repeatedly hit record lows this year, although it saw a rally in July. Despite this recent uptick, the stock remains down 35% year to date.
However, not all ETFs associated with Trump-related themes are underperforming. The Point Bridge America First ETF, identified by the ticker MAGA, experienced a smaller decline than the broader U.S. stock market in March during the initial phase of the Iran conflict and has managed to remain higher for the year. Hal Lambert, founder of Point Bridge Capital, acknowledged the challenges posed by the Iran war and its impact on energy prices, which can affect re-shoring themes. Nevertheless, he pointed out that ‘there’s a lot of energy in the MAGA ETF,’ which has helped the fund’s performance to largely mirror that of the S&P 500.
The current market environment, characterized by geopolitical instability and inflationary pressures, has significantly altered the trajectory of the ‘Trump Trade.’ What was once a favored strategy is now a cautionary tale, illustrating how quickly market sentiment and macroeconomic factors can reshape investment outcomes, even for themes initially perceived as robust.
