Corporate lobbying ETF seeks to profit from influencing politicians

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Corporate lobbying is often criticized for allowing powerful companies undue influence over the democratic process. But if it works, small investors will now at least be able to grab their share of the spoils.

New York-based Strategas Asset Management LLC has unveiled an exchange-traded fund (ETF) designed to tap into companies’ efforts to increase their profitability by lobbying the U.S. federal government.

Dan Clifton, head of policy research and lead portfolio manager for Strategas Global Policy Opportunities ETF SAGP-A, says the launch aimed to capitalize on the U.S. experiencing “the most politically volatile period since the end of the Civil War, with the party in power having changed in seven of the past eight election cycles.

“One year it’s tax cuts or health care reform, then it gets taken away. Companies are now saying they have a greater risk to their business from Washington than from other risks,” he adds.

“They understand that they need to be at the table as part of the process in Washington. We believe these companies have an earnings advantage over other companies.”

The ETF will build on Strategas’ existing policy opportunities portfolio, which is only available to institutional investors via separate accounts.

However, while that strategy is focused purely on large and mid-cap U.S. stocks, Strategas Global Policy Opportunities ETF also encompasses small caps and non-U.S. companies.

Mr. Clifton argues that smaller companies may get more bang from their lobbying buck than large ones, which might have to spend on lobbying every year as a form of “maintenance,” around issues such as workers’ rights and health care.

“Small companies see this as a [research and development] expense. They say, ‘We’re going to get a return on this.’ Small- and mid-cap [companies] have had a tremendous performance in backtesting. It’s the first time we are incorporating that style,” Mr. Clifton says.

Annual lobbying spending in the U.S. has averaged US$3.5-billion in recent years, according to Statista, with the pharmaceuticals, electronics and insurance sectors having the largest outlay.

Rather than total spending, Strategas Global Policy Opportunities ETF weights companies based on their “lobbying intensity,” taking their size into account.

“If [the weightings] were just calculated on the basis of lobbying spend we would have Amazon.com Inc. AMZN-Q, Google LLC GOOGL-Q and AT&T Inc. T-N. None of these companies are in the basket. We need to find companies [for which] the earnings benefits [from successful lobbying] would be the greatest,” Mr. Clifton says.

The initial portfolio is heavy with drug and biotech companies, such as Japan-based Astellas Pharma Inc. ALPMY, Germany-based Fresenius Medical Care Corp. FMS-N and Biogen Inc. BIIB-Q of the U.S. But it also includes drinks companies Brown-Forman Corp. BF-B-N and Diageo PLC DEO-N; tobacco giants Altria Group MO-N and Philip Morris International PM-N; and purveyors of fast-foods such as Domino’s Pizza Inc. DPZ-N and Yum! Brands YUM-N.

Defence stocks such as Lockheed Martin Corp. LMT-N, General Dynamics Corp. GD-N and BAE Systems BAESY are also well represented.

Mr. Clifton cites the successful efforts of biotech companies to help water down proposals to lower prescription drug prices as an example of Strategas Global Policy Opportunities ETF’s investment thesis.

The pre-existing policy opportunities portfolio has had a disappointing performance in recent years, undershooting the S&P 500 every year since 2018.

Mr. Clifton attributes this in part to its sectoral tilts, namely its low exposure to technology stocks and overweighting of pharma and defence, which have not been helpful in recent years.

He also cites the geopolitical hurdles that frustrated lobbyists’ efforts to limit the impact of then-president Donald Trump’s trade tariffs in 2018.

The ETF’s thesis may raise eyebrows, though.

“If corporate lobbying spend can be tracked to excess profits, I think that does raise some questions for that particular company or industry,” says Kenneth Lamont, senior fund analyst for passive strategies at Morningstar Inc.

Nevertheless, Mr. Lamont says it was “not the only ETF that has strayed into a moral or an ethical grey area,” citing the B.A.D ETF BAD-A, which invests in gambling, alcohol and drugs as another example.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, says despite the belief held by some that “government policy should be done on behalf of the people without corporate interest,” he did not think most investors or Americans at large viewed the practice as unethical.

Mr. Rosenbluth draws allusions to Democratic Large-Cap Core Fund DEMZ-Q and the Point Bridge GOP Stock Tracker ETF MAGA-A, which invest in companies supportive of Democrat and Republican candidates, respectively, but adds that Strategas Global Policy Opportunities ETF was at least “playing on both sides of the aisle, so you don’t have to be politically affiliated to one or the other to invest in it.” Moreover, it offers a portfolio “you are not going to find elsewhere.”

Still, Nathan Geraci, president of the ETF Store, a financial advisor in Kansas, says Strategas Global Policy Opportunities ETF’s challenge “will be overcoming any perception of partisanship or political tie-ins.”

“Corporate lobbying inevitably becomes intertwined with politics and thus can become emotionally charged at times. Most advisors prefer not mixing politics with portfolios for just that reason.”

Mr. Geraci also notes that EventShares US Legislative Opportunities ETF, which focused on stocks its managers believed would gain from changes in government policy and regulation, closed down in August 2020 with assets of just US$23-million.

“Ultimately, the success of this ETF will hinge on performance and marketing itself as entirely politically neutral,” he adds.

Mr. Clifton says he could “understand that people would say this is bad, it feels dirty,” but defended both corporate lobbying and his fund.

“The beauty of the American system is that everybody is involved. NGOs, labour unions ... I would argue there might be more power on that side than on the corporate side,” he says.

“We believe in lobbying. It helps avoid mistakes. If you are not at the table, you are going to be on the menu.”

As for Strategas Global Policy Opportunities ETF, “we don’t make the rules,” Mr. Clifton says, “we just figured out there was alpha there.”

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