Republicans and Democrats Own Stocks in New ETFs - Good Idea?

Two new exchange-traded funds entered the exchange-traded fund arena on Tuesday, promising to add "meaningful value" to portfolios as they fought for the investor's attention in an arena teeming with thematic products. It remains to be seen how the latter will play out.

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This week, the Unusual Whales Subversive Democratic ETFNANC +0.12% (ticker: NANC) and Unusual Whales Subversive Republican ETKRUZ +0.19% (KRUZ) equity-based exchange-traded funds were launched to invest in companies based on stocks purchased and sold by sitting, registered Democratic and Republican members of the U.S. Congress. Members of Congress, and/or their spouses, as the case may be.

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In the end, the two ETFs are ultimately tools for investors who want to own stocks that elected representatives are likely to own, perhaps because they believe congress members are privy to inside information that will enable them to outperform the broader market.

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The Subversive and Unusual Whales believe this is a serious product that should be included in an investor's portfolio. “Our goal is to offer our institutional knowledge and network to all investors in order to drive value for their portfolios, according to the press release issued by Subversive ETF, an ETF issuer. There is a report on Trade Algo's blog on the two ETFs, which indicates that Congress' holdings outperformed the S&P 500SPX +0.21% by about 17.5% in 2022 and by about 1.2% in 2021. Trade Algo has asked the issuer to confirm this but hasn't gotten a response yet.

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There are, however, costs associated with piggybacking on the personal portfolios of legislators. Investors will be charged 0.75% management fees for each ETF, which is a lot higher than the average of 0.61% charged by thematic ETFs in 2022, according to Morningstar data. In comparison, a sector fund, such as the Vanguard Large-Cap ETF (VV), charges 0.04%, while the SPDR S&P 500 ETF (SPY) charges 0.095%. This is especially important over the long run since expenses eat into investor returns.

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Christian Cooper of Subversive Capital Advisors says issuers are racing to offer the lowest thematic ETF fees, but he believes he can do so at this rate.

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This is not the first time that investors have been offered a way to capture their political preferences in the form of funds. A fund called the Point Bridge GOP Stock Tracker ETF (MAGA), which has a ticker that is geared toward Republicans, emphasizes companies that have made relatively high donations to Republican politicians since 2017, and includes energy companies like Halliburton HAL -3.39% (HAL) and Marathon Petroleum (MPC). Another ETF that has a left-leaning stance, the Democratic Large Cap Core ETF (DEMZ), follows a similar methodology and owns companies such as Apple AAPL +0.86% (AAPL) and M&T Bank (MTB), among others.

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"A lot of asset managers are hoping that this is going to be something different," Elisabeth Kashner, director of ETF research at FactSet, told Trade Algo in a recent interview. “There’s so much something different.”

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Sadly, many thematics just disappear from the face of the earth if they do not manage to gather enough investor demand, as measured by the number of assets under management. In 2022, there are only about 24 thematic ETFs that will have exceeded $1 billion in assets, according to Morningstar data. It is important for investors to give ETFs at least three months before judging their size. It is estimated that there are less than $1 million of assets under management in the Unusual Whales Subversive Democratic ETF and Republican ETF, respectively. On Tuesday there were 87,400 shares traded between the two ETFs, and on Wednesday there were more than 100,000 shares traded between the two ETFs

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“This will drive institutional adoption,” Cooper said when referring to the expectations of demand for the coming years, which he believes will propel adoption.

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It is true that some thematic bets can pay off in the end. Research has shown that low-volatility exchange-traded funds (ETFs) like iShares MSCI USA Min Vol Factor (USMV) were relative winners last year, falling about 9% compared with S&P's nearly 20% decline, and they can yield returns at least as good as a market-weighted index with smaller swings in price.

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There are about 280 thematic ETFs, so NANC and KRUZ might not stand out just because they have a clever theme.