ETFs that track lawmakers’ trades ‘outperform’

American politicians achieve better risk-adjusted returns than those estimated by the general public, according to an analysis of two partisan exchange-traded funds that demonstrates their very different portfolios.

The findings could also reignite debate over whether members of Congress should be able to make active stock trading decisions, given their potential access to tradeable confidential information.

Subversive Capital Advisor launched ETFs tracking the investments of Democratic politicians (NANC) and their Republican rivals (KRUZ) in February of last year.

KRUZ is referring to Republican Sen. Ted Cruz while NANC is referring to Nancy Pelosi, the former Democratic Speaker of the House of Representatives, whose husband, Paul, has traded extensively.

ETFs mimic the trades of members of Congress, who are mandated by the Stop Trading on Congressional Knowledge Act (Stock) to disclose any trades worth more than $1,000 made by themselves or their spouses within a 45 days.

Christian Cooper, portfolio manager of both ETFs, argued that NANC and KRUZ had, in their own way, beaten the market. NANC returned 37.5 percent in the year through March, outpacing the S&P 500’s 29.9 percent, with better Sharpe and Sortino ratios – two measures of risk-adjusted returns.

KRUZ fared less well, with an increase of 25.4 percent over the same period. However, it beat the 22.2 percent return (with better Sharpe and Sortino ratios) of the Dow Jones Industrial Average, which Cooper said was a fairer comparison given the radically different sector weightings of KRUZ and his portfolio loaded with value stocks.

“NANC trades like the S&P and KRUZ like the Dow,” he said.

This view arises from the very different portfolios of ETFs. NANC’s seven largest holdings are all tech-related companies, led by Nvidia, Microsoft and Amazon.

Six of the seven companies are overweight to the S&P 500, with Salesforce held at nearly eight times its market weight. The Democratic top 10 also includes cybersecurity company CrowdStrike Holdings and API Group, a security systems provider, neither of which is even listed in the S&P. The API is also completely absent from KRUZ’s stock portfolio, consisting of 487 securities.

In contrast, KRUZ’s top holding is oil major Shell – nowhere to be found among NANC’s 734 holdings – followed by its sector peer ConocoPhillips, NANC’s 200th largest holding. Chevron is also in the KRUZ top 10, but 181st in the NANC.

The deep divergence does not end there. Mid-cap industrialist Comfort Systems USA holds the third-largest position in KRUZ, with fellow mid-cap National Fuel Gas and low-profile energy services company NGL Energy Partners also in the top 10. Neither of them is not visible anywhere in NANC. .

“It’s really amazing how different they are,” Cooper said. “There are 1,200 names between the funds and the overlap between them is almost non-existent. It’s almost like a psychological test for worldview.

KRUZ has only 3.8 percent exposure to Magnificent Seven tech stocks, compared to 28.7 percent in the S&P 500 and 35.6 percent in NANC.

“There may be a moral aversion to investing in some of these companies. [among Republicans]“These are coastal businesses, these are global elites who are often vilified in conservative media, through which their worldview is filtered.”

Bryan Armor, director of passive strategies research for North America at Morningstar, said that “politically, there’s a pretty clear dividing line as to what types of companies fit into each party.”

“The Democratic version is at 1 percent energy while the Republican version is at almost 14 percent. Building materials and industrial products are the same,” said Armour, who added that while he wasn’t too surprised, “it doesn’t make sense to me that you would invest differently based on your beliefs policies”.

Cooper believed that each political tribe not only saw the world differently, but was also positioning itself for its respective candidate to win the November presidential election.

NANC’s portfolio is “very cloud focused, technology focused, the world is good, we’re going to have three” [US interest] rate cuts this year. Everything is rosy. It is a world in which [Joe] Biden is re-elected,” he said.

“The world in which rates do not fall is diametrically opposed. If you think [Donald] Trump will win the election, as global energy will outperform. There are going to be huge tax breaks for assets like this, and that’s 100% what’s driving [KRUZ’s portfolio]” Cooper added.

And not only do Democrats and Republicans see a different future, they even see the present very differently.

“Our political divide is so stark and so incredibly broad that liberals and conservatives literally don’t even see the same economy,” Cooper said.

This ties in with the data on economic sentiment. Under President Trump, about 60% of Republicans thought the U.S. economy was improving, compared with only about 10% of Democrats, according to data compiled by YouGov and The Economist.

However, by the time Biden took office in January 2021, Republicans’ economic sentiment had plummeted, while Democrats immediately began to feel better about the economy.

Cooper argued that the outperformance of each ETF relative to what he considers their respective benchmark suggested that the overweight companies in both ETFs were significantly better than the average listed company.

“The wisdom of the congressional crowd having the most access to and choosing to own information is the secret sauce.”

Armor, however, was not convinced by Cooper’s suggestion that the Dow was a fair comparison for KRUZ. He also doubted that NANC’s outperformance reflected a secret recipe.

“The reason it’s worked so well is because it’s very technological,” Armor said. “If the idea is to isolate some sort of insider knowledge, I don’t think that’s the right way to go about it. I don’t think there is any benefit here.