ETFs that track the trades of politicians
ETFs that track the trades of politicians
Do they outperform?
According to a study published in the Journal of Financial and Quantitative Analysis in 2004, the stock picks of U.S. senators outperformed the market by 12 per cent annually. The same academics published another paper in 2011 that found members of the House of Representatives outperformed by six per cent annually.
Such studies, along with ongoing media reports, led Americans to increasingly suspect that the process of hammering out legislation on Capital Hill was providing members of Congress with advance knowledge of legislative changes that they could use to trade in and out of the shares of the various companies impacted.
In 2012, Congress moved to stem the rising tide of complaints by passing the STOCK Act. A main feature was the requirement that Congressional members and their families had to publicly disclose their stock transactions on a government website.
Several investment websites sprung up to mine and report on this trove of data. It also led to the formation in early 2023 of two ETFs that track Congressional trades:
Unusual Whales Subversive Democratic Trading ETF (NANC)
Unusual Whales Subversive Republican Trading ETF (KRUZ)
These ETFs make it easy to index a part of one’s portfolio to Congressional stock trades. Here is how NANC and KRUZ have performed so far.
Year to May 31: NANC up 31.7% vs. S&P 500 at 25.5% & KRUZ at 24.3%
Since inception: NANC up 39.2% vs. S&P 500 at 29.0% & KRUZ at 19.2%
So, the Democrats have outperformed the Republicans and the S&P 500 Index to date.
One problem with this view: the STOCK Act database used to calculate the ETFs does not have quality data. One big reason is because of poor compliance with reporting requirements. Penalties for noncompliance are only $200, and can be waived. Also, the bar for proving noncompliance is set high.
There is in fact a history of lawmakers taking several months to more than a year when reporting their trades. It appears some don’t even report: research by the non-profit organization Public Citizen found that the trades disclosed in the first three years of the STOCK Act were two-thirds lower than what would be expected.
Indeed, William Belmont and three other academics argued in their 2020 paper, Relief Rally: Senators As Feckless As The Rest of Us at Stock Picking, that, based on the STOCK Act database, there is no statistical evidence for the view that Congressional stock pickers consistently outperform.
So, the outperformance of NANC may have been due more to random variation in the data, or a lucky occurrence that will not hold up over time.
Then again, it is possible Democrats could be more compliant in reporting their trades that rely on insider knowledge, so the outperformance could endure. Being somewhat cynical in nature, I suspect this is not the case. But it might be something worth investigating, and reporting on in a future post.
Photo Credit: Jessica Rodriguez Rivas.