The Impact of Policy and Regulatory Changes on ETF Portfolio Construction

Published August 9, 2025 – By Aniket Ullal, SVP and Head, ETF Research & Analytics  

Key Takeaways 

• Government policy has become a critical driver of investor returns and flows as shown by the market cycles since the November 2, 2024, election in the U.S.
• Translating a policy related thesis into an investible action requires the careful screening and comparison of ETFs, such as choosing between healthcare ETFs in response to the Medicaid changes in the One Big Beautiful Bill.
• Another important consideration is timing, since ETFs will usually move in anticipation of policy changes. This is best highlighted by examining the price movement of the Invesco Solar ETF (TAN) over the last 10 years.
• Investors also need to assess the second order effects of policies, such as the impact on intra-sector stock dispersion and the U.S. dollar.
• CFRA’s Washington Analysis policy team and ETF research team can be useful resources in understanding how policy can shape outcomes for investors.

The Growing Impact of Trade & Regulatory Policy on Investment Outcomes 

As the Trump 2.0 agenda continues to take shape, government policy has become a critical driver of investor returns and flows. The current administration is attempting to re-shape the U.S. economy in fundamental ways through trade policy, sector specific industrial policy, and de-regulation. As a result, it is important for investors to monitor these issues and factor them into ETF portfolio construction and monitoring.

This can be seen in Figure 1, which shows the performance of specific asset classes prior to and after the re-election of President Trump. After the November 2024 election, the S&P 500 started rallying but then reversed in February after President Trump announced tariffs on U.S. trading partners. This sharp downturn lasted until April 8, 2025, when the first pause in reciprocal tariffs was announced. After that, the market largely returned to a “risk-on” environment, as shown by the returns for ETFs linked to U.S. large cap equities, the Nasdaq-100 (a proxy for the AI trade), bitcoin and U.S. small caps. It highlights how policy has been the primary driver of market cycles and investment returns in this current post-election environment.

Figure 1 – Price Return for Select “Risk On” ETFs – Market Cycles Post Nov ’24 Election

Source: CFRA’s FUNDynamix ETF database; As of June 30, 2025 

A Framework for Investors to Classify Policy Changes

Having a framework to classify policy issues is useful to placing these changes in a broader context. The table below shows the broad categories of policy changes with some historical examples. 

Table 1 – Broad Framework for Policy and Regulatory Changes in the U.S.

Source: CFRA analysis 

The policies of the current Trump administration and Congress correspond to most of these categories. Fiscal policy has been shaped by the One Big Beautiful Bill (OBBB) which includes extension of the tax cuts from the original Tax Cuts and Jobs Act (TCJA) of 2017. Tariff policies have also changed significantly in 2025, and the government is pursuing sector specific policies in areas like crypto, defense, semiconductors, and healthcare.

Translating Policy into ETF Selection Decisions 

For ETF investors, translating a policy related thesis into an investible action requires the careful screening and comparison of ETFs. Often policy actions may influence only specific stocks or sub-industries within a sector, and so the choice of the appropriate ETF is important. As an example, the recently passed One Big Beautiful Bill included Medicaid restructuring, including new Medicaid work requirements, which will negatively impact managed care organizations (MCOs) and hospitals. CFRA’s Washington Analysis policy team expects covered lives to decline beginning in 2027and the financial burden to shift more acutely to hospitals as rising uncompensated care costs accelerate into 2026 and 2027.  

There are two ETFs which provide exposure to the healthcare service provider sector – the iShares US Healthcare Providers ETF (IHF) and SPDR S&P Healthcare Services ETF (XHS). However, they have very different index weighting schemes, which result in varying exposures to specific constituent holdings. IHF is market cap weighted and its top 15 holdings include MCOs and hospitals such as Centene (CNC), Molina Healthcare (MOH), UnitedHealth Group (UNH), and Elevance Health (ELV). MOH and CNC are highly likely to be impacted by the budget bill, since they have the largest Medicaid businesses of the large insurers (Medicaid is 79% and 58% of their managed care businesses, respectively). CRA’s analysts also expect ELV and UNH to see top-line impacts.

In contrast, XHS is equal weighted with no single stock having a weight above 3%. It is therefore better designed to withstand downside risks to specific names like UNH, which makes up more than 20% of IHF. Being able to compare the security selection criteria, weighting schemes (for indexed ETFs), and underlying holdings is important in translating policy related themes into actionable ETF security selection. 

Table 2 – Comparison of Top 15 Stock Holdings for IHF and XH

Source: CFRA’s FUNDynamix ETF database; As of June 26, 2025 

Anticipating Price Changes Prior to Policy Enactment

Another important consideration is timing, since ETFs will usually move in anticipation of policy changes. This is best highlighted by examining the price movement of the Invesco Solar ETF (TAN). TAN had a 450% price between March 2022 (prior to Biden being elected) and Feb 2021 (one month after his inauguration), with much of that price appreciation in anticipation of an administration and Congress that would enact legislation more supportive of renewable energy. Similarly, TAN saw a significant decline in price after President Trump’s reelection, much before the changes to clean energy credits in the Inflation Reduction Act were put into the budget.

Figure 2 – 10 Year Relative Price Performance of Solar (TAN) and Oil Production (IEO)

Source: CFRA’s FUNDynamix ETF database; As of June 26, 2025 

These changes underscore how policy can drive ETF prices significantly even prior to actual legislation being enacted.

Examining Policy Trends for Second Order Investing Effects

Government policy can impact specific stocks and sectors, but it is important for investors to also assess second order effects of these policies. Often, these can have a higher impact on returns and portfolio construction. As an example, the current trade policies drove up dispersion between stocks in the first half of 2025 (see Figure 3). 

Figure 3 – Realized Dispersion for S&P 500 – Trailing 10 Years (June ‘15 – June ‘25)

Source: CFRA analysis; As of June 30, 2025 

This dispersion increase was most pronounced in the retail sector. In 2024, there was a 6% return differential between the low-cost retailers Dollar General (DG), Dollar Tree (DLTR) and Five Below (FIVE). In 1H ’25, the return differential between them rose to 20% due to differences in imports from China. DG has a much lower percentage of goods either directly or indirectly imported from China, at 10-15%. For DLTR and FIVE, that import percentage was much higher at 50-60%, making these stocks much more vulnerable to tariff shocks.  

Analysis by S&P Dow Jones Indices shows that higher stock dispersion results in a wider range of outcomes for active fund managers. Therefore, policy driven dispersion could result in an environment where investors seek out more active ETFs.  

Another example of second order effects is the impact of trade on the dollar. The US Broad dollar index (DTWEXBGS), which measures the dollar against a trade-weighted basket of currencies, was down 7% in 1H ’25 due to tariff policies. Although some of these declines have since been partially reversed, a weak dollar has important implications for investors, including favoring export-oriented firms that benefit from competitive pricing and favorable currency conversion back into dollars.

CFRA’s Policy Research and ETF Platform

Policy decisions influence capital flows and ETF returns and having the appropriate toolkit is important for investors. CFRA’s Washington Analysis policy team proves timely, in-depth coverage spanning market moving legislative, regulatory, judicial, and political developments with a focus on the sectors most impacted by policy developments, including healthcare, energy, financial services, defense, technology, media, and telecommunications. The team also forecasts and advises on cross-sector and market moving developments across tax, trade, fiscal and M&A issues. 

CFRA also offers a comprehensive set of data, ratings and research to track the global ETF industry. The ETF data consists of three components – constituent holdings, proprietary classifications, and daily statistics. The latter includes daily flows for individual ETFs, available via both feed and API. Flows data can also be accessed and analyzed using CFRA’s FUNDynamix ETF platform. Trial access for CFRA’s ETF data and tools can be requested here. 

Analyzing ETF Flow Trends for Trading & Investment Analysis 

Published May 21, 2025 – By Aniket Ullal, SVP and Head, ETF Research & Analytics  

Key Takeaways 

• ETF flows measure the value of investment dollars that investors have either added or removed from an exchange traded fund.
• The net flow calculation reflects the changes in the shares outstanding of the ETF based on investor demand.
• ETF flows can be a useful input into assessing investor risk on / risk off sentiment. Flows can also be analyzed through the lenses of sector, strategy and theme.
• However, incorporating nuances such as ‘create to short’ and the impact of model portfolios is important when using flows data in trading analysis.

The Definition of Exchange Traded Fund (ETF) Flows

ETF flows measure the value of investment dollars that investors have either added or withdrawn from an exchange traded fund (ETF). It is important to note that flow is not the only factor that increases or reduces the assets in an ETF. ETF assets also change due to changes in the market value of the existing securities held in the ETF.

In other words, the value of assets in an ETF can change for two reasons – net flows (i.e. new investor money coming in or out of the fund) and market movement (i.e. the change in the market value of the underlying securities already in the fund).

Let us explore this with a very simple example: Let’s assume an ETF has $100M in assets at the end of Day 0. On Day 1, let’s assume net inflows of $9.5M, i.e. investors put in $9.5M of new money into the ETF. Let’s also assume that the value of the securities already held in the ETF goes down by $5M due to a market decline.

So, there are two offsetting changes happening to that ETF on the same day – the value of assets is going up due to a new inflow, but assets are also declining due to market movements. Therefore, on Day 1:

Table 1: Components of asset change (net flows and market movement).

Data from CFRA FUNDynamix ETF platform as of May 17, 2025 

Incorporating all these nuances such as ‘create to short’ and the impact of model portfolios is important when using flows data as a signal in trading models.  

CFRA’s ETF Flows Data Set 

CFRA offers a comprehensive set of data, ratings and research to track the global ETF industry. The ETF data consists of three components – constituent holdings, proprietary classifications, and daily statistics. The latter includes daily flows for individual ETFs, available via both feed and API. Flows data can also be accessed and analyzed using CFRA’s FUNDynamix ETF platform.

Trial access for CFRA’s ETF data and tools can be requested here.  

How ETF Classification Helps RIAs and Hedge Funds Optimize Investments

Published March 20, 2025 – By Aniket Ullal, SVP and Head, ETF Research & Analytics  

Key Takeaways 

• The Evolution of ETF Classification: Over the last two decades, investing has shifted towards fee-based advice and the rapid adoption of ETFs. The implication of this is that the legacy “style-box” approach to fund classification is no longer relevant.
• New Tools for RIAs and Hedge Funds: Increasingly, RIAs and hedge funds need to be able to screen, find, and evaluate ETFs based on mega trend themes and quantitative investment factors.
• The Need for a Modern, Multi-Dimensional ETF Classification System: A modern and flexible classification system should support “multi-tagging” of ETFs on different dimensions, rather than forcing ETFs into one style box.
• How CFRA’s FUNDynamix Simplifies ETF Selection: CFRA’s tools such as its FUNDynamix ETF classification and screening system can help in this process.

The Evolution of ETF Classifications Away from Traditional “Style Boxes” 

Over the last two decades, the asset management industry has seen the emergence of multiple important trends. The first is the growth of fee-based investment advice, typically provided by independent Registered Investment Advisors (RIAs). Fee-based advice has also been adopted in brokerage firms, sometimes in a hybrid model that combines fee-based advice with commission-based services. This growth in fee-based advice has driven a second important trend – the rapid adoption of Exchange Traded Funds (ETFs). With their attributes of low cost, tax efficiency, and transparency, ETFs have been a perfect fit for fee-based advisors. Attributes like tradability have resulted in ETFs also being widely adopted by other market participants like hedge funds.

The implication of these trends is that the legacy “style-box” approach of classifying funds based solely on the two dimensions of market capitalization and growth/value tilts is now outdated. Instead, RIAs and hedge funds tend to take a more macro, top-down approach to investing. Professional investors now need to screen for ETFs based on specific themes and factors, in response to changes in the broader economic and policy environment.

This shift in approach to classifications impacts the entire investment process from fund selection and portfolio optimization to portfolio monitoring and risk management. RIAs and hedge funds need modern tools that support them in finding and monitoring ETFs based on both cross-sector themes as well as quantitative investment factors.

How ETF Classification Helps Screen and Find Thematic ETFs

To understand why theme-based investing has grown in importance, it is useful to contrast it with traditional sector-investing. In traditional sector-investing, stocks and funds are grouped, selected and evaluated based on a sector classification system. The most widely adopted sector classification system is the Global Industry Classification Standard (GICS), which was jointly created by S&P Global and MSCI. The advantage of a standard sector classification is that investors can have a shared, common approach to industry classification. For example, investors may not universally agree on whether Amazon (AMZN) is a consumer discretionary stock, or a technology stock. But since GICS classifies AMZN as a consumer discretionary stock, this approach is used by many index providers and therefore index linked sector-focused ETFs would classify AMZN as consumer discretionary.

The limitation of this traditional sector investing approach is that it cannot accommodate emerging megatrends that cut across the GICS sector framework. For example, “Robotics and AI” is an important new trend that investors want exposure to. However, the firms that are involved in this may be classified into different GICS sectors such as Industrials, IT and Healthcare. Therefore, it would be difficult to get exposure to this mega trend using traditional sector ETFs. Instead, investors would be better off using a thematic ETF that holds stocks across sectors.

Figure 1 shows the sector exposure for the “Global X Robotics & Artificial Intelligence ETF” (BOTZ) and highlights the cross-sector nature of this fund. It has a significant weight in Industrials, but also hold stocks in IT, Healthcare and other sectors.

Figure 1 – GICS Sector Exposure for BOTZ (Global X Robotics & Artificial Intelligence ETF)

Modern ETF Classification in Action

In a recent Talk ETFs interview, CFRA’s Aniket Ullal explains how ETF classification is evolving beyond style boxes to focus on megatrends, thematic, and factor-based strategies. This shift aligns with the approach outlined in this blog — helping RIAs and hedge funds better align portfolios with today’s market realities.

ETF Comparison, Rankings and Ratings

Published January 29, 2025 – By Aniket Ullal, SVP and Head, ETF Research & Analytics  

Key Takeaways 

• ETF assets reached $10.4 trillion at the end of 2024, having grown at an impressive 18% annualized growth rate over the prior ten years. This growing popularity of ETFs has made ratings and comparisons more critical than ever.
• CFRA’s ETF ratings show that investors would have benefited from using them in portfolio construction, since the higher rated funds outperformed the lower rated ones.
• A robust ETF ratings system should use multiple inputs including the underlying constituent holdings. It must also be timely and forward-looking.
• CFRA uses a dynamic, machine-learning model that rates each eligible ETF within 2 months of its launch, providing timely insight to investors. CFRA’s ETF data and ratings are used by a range of wealth and institutional clients.

Introduction 

As we step into 2025, the U.S. equity market continues to captivate investors with its resilience and complexity. From evolving macroeconomic conditions to sector-specific dynamics, understanding the broader outlook is essential for informed investment decisions. This blog explores key factors shaping the market and offers insights to help investors strategize for the year ahead.

The Exchange Traded Fund (ETF) structure has firmly established itself as an investment vehicle of choice for both retail and institutional investors. In the US, ETF assets reached $10.4 trillion at the end of 2024, having grown at an impressive 18% annualized growth rate over a 10-year period, from $2 trillion at the end of 2014. Globally, ETF assets exceeded $14.9 trillion at the end of 2024. 

This expanding universe of ETFs has made comparisons more critical than ever for advisors and investors. For example, as of January 21, 2025, there were 161 ETFs listed in the U.S. containing the term “growth” in the fund name. These growth funds vary widely in their intended strategy, constituent holdings and past performance. Selecting an ETF from this universe for the growth sleeve of a portfolio requires specialized tools that facilitate the screening, comparison and rating of ETFs. 

CFRA’s ETF tools are specifically designed to facilitate the ETF search, comparison and selection process. A granular screener helps filter through the vast ETF universe based on different types of strategies, themes and factors. Detailed fund pages help to examine each fund based on its holdings, returns and historical sector exposure. Finally, CFRA publishes ETF ratings on a 1-5 scale based on the probability of an ETF outperforming its peers. In combination, these tools can serve as critical guideposts for financial professionals and investors who are looking to build ETF based portfolios.  

How ETF Rankings Can Drive Better Portfolio Performance  

Selecting the appropriate ETF within a category can be critical to superior portfolio construction and performance.  ETF ratings can be a useful input in this process. Figure 1 shows the average total returns of ETFs in 2024 for core domestic equity ETFs listed in the U.S., based on the CFRA ratings the funds received at year end 2023. On average, the core domestic equity ETFs that received a higher rating at the end of 2023 subsequently performed better in 2024 than those that received lower ratings. For example, core equity ETFs that were rated 5 STARs at the end of 2023 returned 24% on average in 2024, compared to the 10% return for ETFs that were rated 1 STAR.  

Figure 1: Average ETF Return in 2024 by CFRA Rating for Core U.S. Equity ETFs