From Ballots to Bloodbaths: How Political Surprises Can Rock ETF Markets

When Politics Moves Markets

Investors spend considerable time analyzing earnings, valuations, interest rates, and economic growth. But sometimes, one of the biggest drivers of market performance has little to do with any of them.

Politics.

An unexpected election result or policy announcement can change the outlook for an entire country or industry almost overnight. And while political uncertainty is often viewed as a risk, the market reaction isn't always negative.

For ETF investors, these events also raise an interesting question: what happens when an ETF continues trading while its underlying market is closed or adjusting to new information?

A Lesson From Malaysia

In March 2008, I was trading international ETFs at Goldman Sachs when Malaysia held its general election.

The results surprised investors. The ruling coalition lost its longstanding two-thirds parliamentary majority, and when the Malaysian market reopened on March 10, its benchmark index declined approximately 9.5%, after an intraday decline of more than 10% triggered a trading halt.

At the time, I was managing a large, broadly dollar-neutral portfolio of international ETFs. Despite that positioning, a relatively small long exposure to Malaysia resulted in a meaningful loss.

It was an important reminder that being dollar-neutral doesn't eliminate country-specific risk.

You can hedge market exposure, currencies, and other measurable risks, but an unexpected political event over a weekend can reprice a market before you have much opportunity to react.

Brazil and Argentina: Two Different Market Reactions

Brazil offers a particularly interesting example of how political expectations can move ETF prices.

Following the first round of Brazil's October 2026 presidential election, the iShares MSCI Brazil ETF

rallied approximately 12.5% on October 5 as investors reassessed the likely outcome and its potential economic implications.

But following the October 25 runoff, in which President Luiz Inácio Lula da Silva was reelected, EWZ opened the next U.S. trading session at $31.71, compared with its previous closing price of $42.59, a decline of approximately 25.5%.

The ETF recovered some of those losses during the session, closing at $34.15, down approximately 19.8% for the day.

These were U.S.-listed ETF market-price movements, not returns for Brazil's local equity benchmark.

The reversal illustrates how quickly changing political expectations can affect ETF prices.

Argentina provides a contrasting example.

Following Javier Milei's presidential election victory in November 2023, the Global X MSCI Argentina ETF

gained approximately 11.6% in the next U.S. trading session. Following his party's strong midterm election performance in October 2025, ARGT rose approximately 18.5% in a single day.

These reactions don't necessarily establish whether the political outcomes were ultimately beneficial or harmful to the countries involved. They show how investors adjusted expectations about future economic policies.

And in Argentina's 2023 election, the domestic equity market was closed for a holiday while ARGT continued trading in the United States.

Political Risk Isn't Limited to Emerging Markets

The United States provides examples as well.

During the 2016 presidential election, U.S. stock futures initially declined sharply as Donald Trump's victory became apparent. Yet the market reversed, and the S&P 500 finished the following session approximately 1.1% higher.

Following the 2024 election, the S&P 500 gained approximately 2.5%. But not every industry participated.

The Energy Select Sector SPDR Fund

rose approximately 3.9%, while the Invesco Solar ETF

TAN

+3.02%

declined approximately 10.9%.

The broader market's direction told only part of the story. Investors were also reassessing which industries might benefit or face challenges under anticipated policies.

What This Means for ETF Trading

Political events can create significant challenges for ETF market makers, particularly when the underlying securities aren't trading.

An international ETF may continue trading in New York even though its local market is closed. Market makers must estimate the portfolio's fair value using available information, including currencies, futures, related securities, and other market indicators.

When uncertainty increases, bid-ask spreads may widen to reflect the additional risk of providing liquidity.

An ETF may also appear to trade at a substantial premium or discount to its reported NAV. But if the underlying securities' valuations have not fully incorporated new information, the ETF's market price may be providing a more current indication of value.

That doesn't mean every premium or discount is justified. It means investors need to understand what is driving it.

Most importantly, ETF liquidity should not be confused with protection from market risk.

An ETF may provide investors with the ability to trade when its underlying market is closed, but that doesn't mean they can trade at prices prevailing before the political event.

Final Thoughts

Political events can create significant market movements in either direction.

Malaysia in 2008 demonstrated the downside of an unexpected election result. Brazil in 2026 showed how quickly political expectations can reverse, while Argentina demonstrated that election results can also produce substantial rallies. U.S. elections showed how differently individual sectors can respond.

For ETF investors, the lesson goes beyond political headlines. Understanding how new information affects underlying valuations, market-maker risk, bid-ask spreads, and ETF prices is essential.

Political risk cuts both ways. What matters is understanding how that risk moves through financial markets and ultimately into the price of an ETF.

Disclaimer

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.