ETFs following US lawmakers’ stock trades go live

Investors who believe that members of the US Congress have access to information that could give them a trading advantage can now trade two exchange traded funds that follow members’ stock transactions.

Subversive Capital Advisor, an asset manager, and Unusual Whales, an option flow platform and data provider, on Tuesday launched the Unusual Whales Subversive Democratic ETF (NANC) and the Unusual Whales Subversive Republican ETF (KRUZ).

The two ETFs, whose tickers are a play on the names of US politicians on opposite sides of the political spectrum — congresswoman Nancy Pelosi, the former Democratic speaker of the House of Representatives, and Ted Cruz, the Republican senator — will also invest according to political affiliation.

NANC will only focus on equities purchased or sold by members of Congress who are registered members of the Democratic party and their spouses, a filing with the Securities and Exchange Commission shows, whereas KRUZ will focus on Republican members and their spouses. Both ETFs carry a 0.75 per cent management fee.

“We believe members of Congress have more information than the rest of us, and if they can trade on that information, we should be able to do the same, and now we can,” said Christian Cooper, the ETFs’ portfolio manager.

Cooper said the investments made by members of Congress often outperformed the market. In 2021 they outperformed the S&P 500 by 1.2 percentage points, but average returns were 17.5 percentage points higher than the market last year.

Todd Rosenbluth, head of research at VettaFi, pointed out that there was potentially a significant time lag between any financial transaction and the requirement to report it.

The Stop Trading on Congressional Knowledge (Stock) Act requires mandatory reporting of any trade worth more than $1,000, but it gives 45 days for this reporting to be completed.

But Unusual Whales said back-testing had shown that the average gap between the transaction date and the filing date was getting shorter and was now averaging between 10 and 20 days. The ETFs will only update portfolios based on disclosed holdings and Cooper plans to update the portfolios “around weekly” unless there is a significant change, in which case they will make the change immediately.

Controversy has persisted over Congressional trading. Last month a bill was reintroduced by Congressman Chris Pappas that would effectively ban members of Congress and their spouses from trading individual stocks.

“In the face of growing evidence that far too many members of Congress continue to violate the Stock Act, it’s clear that we must take additional action to stop insider trading and prevent conflicts of interest among legislators,” Pappas said in his announcement at the time.

However, Cooper did not think the bill would pass.

“I think the US Congress is so dysfunctional they won’t ban it [stock trading]. They are more likely to shorten the disclosure times and increase the fines,” he said.

Cooper said each ETF had about 400 holdings but they offered very different exposures, reflecting each party’s “world view”. NANC was “tech-heavy”, he said, while KRUZ was geared towards energy and gambling.

Rosenbluth said there were other obvious flaws with the premise of the ETFs. “Riding on the coat tails of people with different financial objectives and time horizons is a meaningful risk,” he said. “People should own what fits their needs and goals, not someone else’s.”

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