These ETFs let you invest based on political leanings - but taking a stance can be costly

MW These ETFs let you invest based on political leanings - but taking a stance can be costly

By Isabel Wang

'There's no guarantee that any one of these funds will do well under a Democratic regime or a Republican regime,' one analyst notes

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at political thematic ETFs - which offer investors a way to capture their political leanings - and why investors may want to stay away from them.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

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ETF investors gearing up for the 2024 U.S. presidential election may be pondering if there's a way to align their stock investments with their political views - but one ETF analyst warns that people should beware of blending their political and investing positions, as taking a political stand in the market could be costly.

Some of these politically themed exchange-traded funds have been on a tear in 2024. The Democratic Large Cap Core ETF DEMZ - which tracks some of the largest U.S. companies which have given, on average, at least 75% of corporate or employee political contributions to Democratic PACs or candidates in the past three election cycles - has advanced 14.4% so far this year, compared with the S&P 500's SPX 13.2% gain in the same period, according to FactSet data.

On the other end of the spectrum is the American Conservative Values ETF ACVF, with nearly $100 million in assets under management, which tracks a group of firms that are perceived to align with conservative values. The fund has climbed 12.4% so far in 2024, according to FactSet data.

Another type of political thematic fund follows how members of Congress invest.

The Subversive Unusual Whales Democratic Trading ETF NANC and the Subversive Unusual Whales Republican Trading ETF KRUZ respectively aim to copy the stock investments of sitting Democratic and Republican members of Congress and their spouses, according to the funds' filings with the Securities and Exchange Commission.

From the archives (September 2022): New ETFs with tickers NANC, KRUZ aim to track lawmakers' stock buys, as ban on congressional trading looks unlikely before midterm elections

Unveiled in February 2023, the strategies of the NANC and KRUZ funds (notice their ticker symbols?) are based on the premise that members of Congress can trade stocks based on "inside information" and have an edge that most retail investors don't have, said Zachary Evens, manager research analyst at Morningstar Research Services.

"So by following their trades, investors might be able to do better than the market - though I'm extremely skeptical of that," Evens told MarketWatch in a phone interview on Wednesday.

NANC and KRUZ have risen 15.7% and 9%, respectively, so far this year, compared with the S&P 500's 13.2% gain and the Nasdaq Composite's COMP 14.5% advance this year to date, according to FactSet data.

What do political thematic ETFs hold, and how much do they cost?

These political ETFs (and their year-to-date performance) may sound appealing on the surface, as they provide investors a chance to invest in funds that are aligned to their values - or, at least, the trades of certain market-savvy lawmakers. Yet, acccording to Evens, they are "pure speculation vehicles" that are not rooted in any kind of traditional investment research.

"Investors should be aware of what [stocks are] in them, how they're constructed and what the performance drivers are before even considering taking one off the shelf," Evens said. "There's no guarantee that any one of these funds will do well under a Democratic regime or a Republican regime. It's really dependent on the stocks that underlie them."

See: These competing Republican and Democratic ETFs are surprisingly bipartisan in their stock market holdings

While one might think that stock allocations by political preference would be largely predictable - say, tech stocks for Democrats and energy or financial firms for Republicans - in reality, the overlap in the holdings of these ETFs is notable. Neither Democrats nor Republicans can stay away from market darling Nvidia Corp. $(NVDA)$, which is a top-two holding in both NANC and KRUZ.

Additionally, three of DEMZ's top 10 holdings - Microsoft Corp. $(MSFT)$, Costco Wholesale Corp. $(COST)$ and Nvidia - are also owned by the Republican-focused ACVF, according to FactSet data.

"It's not necessarily a Democratic regime versus a Republican regime that drives returns - it's certain stocks, and what makes those stocks tick [and] how those stocks are doing individually," Evens said of ETF returns.

Meanwhile, betting on the stock-picking skills of lawmakers has a price. Investors have to pay a 0.75% management fee for both NANC and KRUZ, and 0.5% and 0.8% for DEMZ and ACVF, respectively. That compares with a less than 0.1% fee for the SPDR S&P 500 ETF Trust SPY and 0.2% for the Invesco QQQ Trust Series I QQQ, according to FactSet data.

Are members of Congress really good at investing?

The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 prohibits members of Congress from buying or selling stocks and other securities on the basis of any privileged information they receive. It also requires Congress members who are trading securities to publicly disclose their transactions within 45 days.

Unfortunately, this mostly provides little value to retail investors, since stock-market conditions usually change considerably from the time when a member of Congress enacts a trade to when it becomes public information weeks later.

See: Push to ban members of Congress from trading stocks gets a fresh shot, thanks to bipartisan Senate deal

Meanwhile, there seems to be "a growing appetite" to ban stock trading entirely among members of Congress, which could weigh on the prospects of politically themed ETFs like NANC and KRUZ, noted Evens.

The Senate Committee on Homeland Security and Governmental Affairs on Wednesday approved a revamped version of a bill that would ban members of Congress, their spouses and dependents from buying or owning individual stocks and other assets. It is the first-time a congressional stock-trading ban has ever passed a Senate committee, according to a press release Wednesday. The bipartisan bill now advances to the full U.S. Senate for consideration.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday.

The good...

   Top performers                                                                                                                                                                       %Performance 
   YieldMax COIN Option Income Strategy ETF                                                                                                                                             5.9 
   CoinShares Valkyrie Bitcoin Fund                                                                                                                                                     3.3 
   ProShares Bitcoin Strategy ETF                                                                                                                                                       3.3 
   iShares Bitcoin Trust Registered                                                                                                                                                     3.3 
   Fidelity Wise Origin Bitcoin Fund                                                                                                                                                    3.3 
   Source: FactSet data through Wednesday, July 24. Start date July 18. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                          %Performance 
   YieldMax TSLA Option Income Strategy ETF   -11.7 
   Invesco PHLX Semiconductor ETF             -6.2 
   iShares Semiconductor ETF                  -5.8 
   VanEck Semiconductor ETF                   -5.7 
   First Trust Nasdaq Semiconductor ETF       -5.4 
   Source: FactSet data 

New ETFs

BlackRock on July 17 launched the iShares U.S. Manufacturing ETF MADE targeting companies poised to benefit from the resurgence of U.S. manufacturing. Unlike traditional sector-based investments, MADE provides access to a broad range of manufacturing and related industries, including consumer cyclicals, technology, automakers, defense contractors and construction companies, among others, the firm said on its website.Kurv Investment Management LLC on Tuesday announced the launch of the Kurv Technology Titans Select ETF KQQQ, an actively managed fund seeking to offer investors "downside mitigation" with concentrated exposure to the largest technology and growth stocks by writing covered calls, the firm said in a press release.YieldMax on Tuesday launched the YieldMax Short NVDA Option Income Strategy ETF DIPS, an actively managed fund that seeks to generate monthly income from a covered put strategy on Nvidia, while providing indirect short exposure to the share price of the chip maker.

Weekly ETF Reads

Why bank stocks don't need 'rotation out of tech' to keep rising after July jump (MarketWatch) Is this ETF a 'meme stock' now? Google searches are spiking for one small-cap fund. (MarketWatch) Which ether ETF is the best to invest in? Here's what spot bitcoin ETFs taught us. (MarketWatch) BlackRock hit by $17bn Asia-Pacific outflows in first half (Financial Times) 100% Downside Protection ETFs: What's the Catch? (MorningStar)Healthcare ETFs Could Be Emergency Care for Advisors (ETF.com)

-Isabel Wang

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July 25, 2024 17:13 ET (21:13 GMT)

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