Politically influential investors like members of Congress may be in a privileged position when it comes to obtaining information ahead of others.GETTY IMAGES
The first U.S.-listed exchanged-traded fund, or ETF, debuted on Jan. 22, 1992, as a way to track the S&P 500. Thirty years later, the SPDR S&P 500 ETF (ticker: SPY) is still going strong, with massive assets under management, high trading volume and a low expense ratio.
Since SPY, many ETFs have come and gone, but few have been as notable or game-changing for the ETF industry. However, that began to change over the last few years as ETF providers released more and more thematic ETFs designed to capitalize on revolutionary, disruptive or emerging trends. Thematic ETFs in recent years have centered on areas like artificial intelligence, electric vehicles, the metaverse, renewable energy and genomics.
“These ETFs are essentially a whimsical way for investors to express their market philosophy or worldview through their investment decisions,” says Curtis Congdon, president at XML Financial Group. “Compared to a traditional ETF, thematic ETFs tend to have more unattractive features such as wider spreads, higher expense ratios and smaller AUM,” he says, using the shorthand for assets under management.
Two of the most recently released and oft-discussed thematic ETFs are Subversive Unusual Whales Democratic ETF (NANC) and Subversive Unusual Whales Republican ETF (KRUZ). Sub-advised by Subversive Capital Advisor LLC, both ETFs use data provider Unusual Whales to actively track stock trades by members of Congress.
Here’s an in-depth look at the strategy, ideology and structure of these niche ETFs, along with expert commentary on their potential risks and rewards:
- Understanding Congressional stock picks.
- Breaking down the new ETFs.
- Expert opinions on NANC and KRUZ.
Understanding Congressional Stock Picks
The stock market is an intelligence game, with various investors attempting to gain an edge through the attainment of information that’s not yet priced in. Politically influential investors like members of Congress may be in a privileged position when it comes to obtaining information ahead of others.
The reason for this? Many members of Congress participate in legislative and executive committees and vote for bills, the outcomes of which can influence the outlooks for companies, industries or sectors. This can potentially expose them to privileged information that if acted upon could result in a substantial advantage over other market participants.
For example, Paul Pelosi, husband of former U.S. House Speaker Nancy Pelosi, sold 25,000 shares of Nvidia Corp. (NVDA) in July 2022, days before the House was expected to consider legislation intended to boost the U.S. semiconductor industry.
To trade securities, members of Congress and their families must file public disclosures as per the Stop Trading on Congressional Knowledge, or STOCK, Act. These disclosures are called Periodic Transaction Reports, or PTRs, and are made available online to the public in the interest of transparency.
However, there can be a delay between when a member of Congress or their family member makes a trade and when they file a PTR. A PTR must be filed by either 30 days from when the member becomes aware of the transaction, or 45 days from when the transaction occurred, whichever is earlier.
Therefore, as long as a member of Congress or their family files a PTR within the specified time, they are permitted to trade. This extends to shares of companies that may be affected by political events they are involved in, as long as they do not trade based on inside information.
Breaking Down the New ETFs
Both NANC and KRUZ have a partisan focus – the former focuses on stocks bought and sold by members of the Democratic Party and their families, while the latter does the same, but for Republicans.
Each ETF creates their initial basket of holdings based on PTRs filed over the last three years. As Democratic and Republican members of Congress trade securities and file PTRs, NANC and KRUZ will mimic their trades accordingly. Both ETFs will attempt to maintain a portfolio of between 500 to 600 stocks and will not track PTRs filed by members of Congress prior to being in office.
When it comes to their individual holdings, NANC and KRUZ begin to differ on political lines. Christian Cooper, the portfolio manager at Subversive Capital overseeing the ETFs, says that “Democrats hold ideas, while Republicans hold things.” When examining their top holdings, a few interesting patterns emerge.
As of Feb. 21, the top holdings in NANC mostly come from the technology sector, with Microsoft Corp. (MSFT), Amazon Inc. (AMZN), Apple Inc. (AAPL), Alphabet Inc. (GOOG, GOOGL), Salesforce Inc. (CRM) and Nvidia accounting for 33.75% of the ETF’s net assets. These companies have been strong drivers of U.S. market growth over the last decade.
In comparison, KRUZ focuses on industries such as energy, chemicals and tobacco. Its current top holdings include the likes of Enterprise Products Partners LP (EPD), Magellan Midstream Partners LP (MMP), Energy Transfer LP (ET), Dow Inc. (DOW), Philip Morris International Inc. (PM) and Shell PLC (SHEL).
“On a trading volume basis, both NANC and KRUZ are roughly equal since launch,” Cooper says. “But in terms of assets under management, or AUM, NANC has attracted $6.18 million, whereas KRUZ has $3.11 million, which I think is due to the marquee name of the former,” he says.
When it comes to fees, both NANC and KRUZ charge an expense ratio of 0.75%. This is in line with many actively managed thematic ETFs, such as Cathie Wood’s famed ARK Innovation ETF (ARKK), which also charges 0.75%, but much higher than index ETFs which can go as low as 0.03%.
Expert Opinions on NANC and KRUZ
Cooper is bullish not only on the potential for alpha, or the ability to consistently beat typical returns, but also for the enhanced transparency he anticipates these ETFs will bring. “Much like Schrödinger’s cat where the act of observation can change outcomes, I think that NANC and KRUZ may change congressional behavior,” he says.
By drawing greater investor attention to the stock-picking habits of members of Congress, KRUZ and NANC may help bring attention to the need for greater market reforms when it comes to how the politically connected invest.
“What Unusual Whales has noted since 2020 is that congressional trading behavior has not changed, but their disclosure time has almost been cut in half from an average of 59 days before 2020 to 29 now,” Cooper says. “I believe that time will be cut even shorter as Unusual Whales calls out more individual behavior, or if Congress itself passes a rule to shorten the disclosure windows and increase the fines for non-compliance,” he says.
However, not all ETF experts are optimistic about the benefits of these ETFs for retail investors. Matthew Tuttle, CEO and chief investment officer of Tuttle Capital Management LLC, says that “there is a fine line between something with a strong use case and a sales gimmick.”
“I’m a huge believer that more tools for investors are better, and that the ETF structure provides a great way to develop, enhance and deploy these tools,” Tuttle says. “However, I think any alpha that can be gained from tracking congressional trades will require real-time disclosures, which you can’t do with the 30-to-45-day delay of PTRs,” he says.
Tuttle Ventures LLC founder and CIO Darin Tuttle (no relation to Matthew), agrees, noting: “Forty-five days is quite a lag for big material market events, so I would only consider investing in these ETFs as a long-term strategy, one that banks on the strategic advantage Congress has with exclusive access to government information.”
That being said, Darin Tuttle is intrigued by the new ETFs. “NANC and KRUZ will be something I keep on my watchlist, as I consider Nancy Pelosi to be one of the best traders in our generation,” Tuttle says. “There’s a Wall Street saying that goes: ‘someone always knowing something,’ and now we can see if Congress can put together a decent track record.”
Source: https://money.usnews.com/investing/articles/track-congressional-stock-picks-with-these-new-etfs
