ETFs following U.S. lawmakers’ stock trades go live

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Investors who believe that members of the U.S. Congress have access to information that could give them a trading advantage can now trade two exchange-traded funds (ETFs) that follow their stock transactions.

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

The two ETFs, whose tickers are a play on the names of U.S. 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.

Unusual Whales Subversive Democratic ETF 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 Unusual Whales Subversive Republican ETF 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,” says Christian Cooper, the ETFs’ portfolio manager.

Mr. Cooper says the investments members of Congress make 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 LLC, points 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 says 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 Mr. Cooper plans to update the portfolios “around weekly” unless there’s a significant change, in which case they will make the change immediately.

Controversy has persisted over Congressional trading. Last month, Congressman Chris Pappas reintroduced a bill 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 we must take additional action to stop insider trading and prevent conflicts of interest among legislators,” Mr. Pappas said in his announcement at the time.

However, Mr. Cooper doesn’t think the bill would pass.

“The U.S. Congress is so dysfunctional it won’t ban it [stock trading]. It’s more likely to shorten the disclosure times and increase fines,” he says.

Mr. Cooper says each ETF had about 400 holdings but they offered very different exposures, reflecting each party’s “world view.” Unusual Whales Subversive Democratic ETF was “tech-heavy,” he says, while Unusual Whales Subversive Republican ETF was geared toward energy and gambling.

Mr. Rosenbluth says there were other obvious flaws with the premise of the ETFs.

“Riding on the coattails of people with different financial objectives and time horizons is a meaningful risk,” he says. “People should own what fits their needs and goals, not someone else’s.”

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