State Street's midterm playbook doesn't need an election

State Street's midterm playbook is worth reading for the parts that have nothing to do with the midterms. The report, as relayed by ETF Trends from Matthew Bartolini, the firm's global head of research at State Street Investment Management, reads prediction markets pointing to a divided Congress in November — Democrats retaking the House, Republicans holding the Senate — and concludes that the slim majorities implied make sweeping legislation unlikely, leaving targeted sector and income ETFs as the answer rather than cash.

The financials case is the strongest item on the shelf, and it works precisely because Congress is irrelevant to it: much of the sector's regulation sits with the Federal Reserve, the FDIC and the SEC rather than the legislature, so the capital rules taking effect by year-end — the ones State Street expects to free up bank balance sheets — proceed regardless of which party holds a gavel. XLF, the Financial Select Sector SPDR, is the vehicle offered for that policy-driven demand, and naming a fund whose thesis is agency rulemaking to sell gridlock insurance is a tell: here the election is the wrapper, not the trade.

Energy is the weak stitch: the sector has outpaced the S&P 500 by roughly 20 percentage points over the past year, and the same report has growth in it falling from 77% in 2026 to negative 11% in 2027. The fund attached to the theme is XLEI, the energy premium-income ETF that turns sector volatility into distribution. Selling options against a sector your own research desk expects to contract is a defensible income trade and a poor total-return one — State Street's premium-income tech fund, XLKI, cushioned the AI selloff with a 19.7% payout while trailing XLK by 11.9% since inception. Options-income products sell investors patience in a wrapper built for exiting, and XLEI is the version whose sponsor has already published the exit forecast.

The rest of the lineup is a straightforward shelf: XSD for semiconductor demand tied to national security and AI self-sufficiency, XAR for defense spending the report puts at $950 billion, up 40% over five years, and CNRG for renewables pulled toward the center of energy policy by AI-driven electricity demand. Of those, defense is the most checkable number in the note and the least dependent on November; sector selection in advisor portfolios has lately been a momentum exercise rather than a policy one, and Q2's RIA net additions went to tech and semiconductors, as August reporting showed. Read the election frame as packaging around a list of funds with separate reasons to exist.

State Street does not claim gridlock erases anything, and the risks it names are not political: sticky inflation and elevated Treasury supply, hence ALLW, which the report describes as combining stocks, bonds, commodities and gold, and RLY for inflation-sensitive exposure. The historical pattern the note leans on — large- and small-cap U.S. stocks rising more after midterms once the political overhang clears — is the only genuinely election-shaped idea in it, and it is a timing call rather than an allocation one. For XLF, the calendar that matters is the year-end capital rules; for XLEI, it is a 2027 forecast its own research desk produced. Neither is on the ballot.