The stock market trades of US lawmakers targeted by ETFs

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Most Americans believe that politicians have an “unfair” advantage in the stock market and should be banned from buying and selling stocks.

Even if they have not been successful with the latter, Joe Public will at least be able to ride the former, if two proposals for exchange-traded funds are approved by the US regulator.

Subversive Capital Advisors, a new manager based in New York, has filed with the Securities and Exchange Commission to launch the Unusual Whales Subversive Democratic Trading ETF (NANC) and an identical Republican sister product (KRUZ).

KRUZ would appear to be a reference to Republican Senator Ted Cruz, while NANC alludes to Nancy Pelosi, the Democratic Speaker of the House of Representatives. In December, Congressional revelations showing her husband, Paul, had bought millions of dollar call options in companies like Alphabet, Roblox, Salesforce and Disney, attracted general attention.

The revelations about Paul Pelosi’s operations galvanized the cross-party moves to crack down on congressional securities trading. They came after lawmakers including Republican Senator Richard Burr were accused of improperly exchanging confidential information about the coronavirus pandemic and Chris Collins, a former Republican congressman, was convicted and sentenced to prison in January 2020. for participating in a plan to commit insider trading, before being pardoned by then-President Donald Trump.

A crackdown would have broad public support, with a January poll suggesting that 76% of Americans believe members of Congress and their spouses have an “unfair” advantage in the financial markets, with only 5% saying they should be authorized to trade. Despite this, legislation to restrict trade has yet to appear.

However, members of Congress are required to disclose all securities transactions over $ 1,000 made by themselves or their spouses within 45 days.

Subversive Capital proposes to use this data to determine which stocks should be in each ETF and their respective weightings. Under “normal circumstances,” the filing says, this would lead to a portfolio of 500-600 shares. The annual management fee would be 1%.

Todd Rosenbluth, head of research at VettaFi, said the proposed funds have similarities to ETFs that track hedge fund operations.

“The adage was to try to ride the trading ideas of so-called smart money. If there is a case for investors to do this related to members of Congress it is that they have information that is not that well known to the public and you can therefore tap into it. their potential experience to anticipate the market, “he said.

As such, they were “the antithesis of meme ETFs,” where the rationale is that collective action and the wisdom of crowds can help ordinary people outsmart the elite.

Furthermore, the possibility remains that stock trading by members of Congress may still be outlawed before NANC and KRUZ gain approval from the SEC.

Nate Geraci, president of The ETF Store, said the 45-day grace period that members of Congress have in which to report stock transactions means that the proposed ETFs “will work with rather outdated data.”

“This could prove problematic if the investment thesis is that members of Congress are acting on the basis of inside information to conduct profitable deals,” he said.

Subversive Capital currently has only one ETF, the Subversive Metaverse ETF (PUNK), which was launched in January. The $ 933,000 actively managed fund invests in metaverse-related companies, with the exception of Meta Platforms, the parent company of Facebook, where it has a short position in the belief that “any market capitalization above zero is a direct assault on democracy. liberal and the survival of our planet “.

He declined to comment on the proposed follow-up ETFs, as sponsors are prohibited from promoting products pending their regulatory approval.

Rosenbluth believed that NANC and KRUZ could attract investors, but potentially for the wrong reasons.

“They might be popular, but in a populist way,” he said. “There is a pushback against the power of Congress that could make these products stand out in an increasingly crowded market, but for me politics and money should be separate.

“At the end of the day, investors should buy ETFs that hold stocks that make sense to them compared to someone else.”

Geraci stated that “the congressional trading issue is currently generating a lot of controversy and attention, which will certainly contribute to strengthening the visibility of these ETFs. The retail crowd, in particular, seems eager to report some Congressional deals and fuel the fire with insider trading claims. ”

Geraci, however, was not convinced by the underlying investment thesis.

“Despite Nancy Pelosi’s salacious headlines about equity trading prowess, it’s unclear whether members of Congress as a whole can generate significant outperformance, which is what the success of these ETFs will ultimately reduce to.” added.

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