US politicians are making better risk-adjusted returns than those chalked up by the public at large, according to analysis of two partisan exchange traded funds that demonstrates their wildly different portfolios.
The findings might also reignite the debate over whether members of Congress should be able to make active stock trading decisions, given their potential access to confidential tradeable information.
Subversive Capital Advisor launched ETFs tracking the investment holdings of Democrat politicians (NANC) and their Republican rivals (KRUZ) in February last year.
KRUZ is a reference to Republican Senator Ted Cruz while NANC alludes to Nancy Pelosi, the Democratic former Speaker of the House of Representatives, whose husband, Paul’s, trading has attracted widespread attention.
The ETFs mimic the trades of members of Congress, who are mandated by the Stop Trading on Congressional Knowledge Act (Stock) to disclose any trades worth more than $1,000 made by themselves or their spouses within 45 days.
Christian Cooper, portfolio manager for both ETFs, argued that both NANC and KRUZ had, in their own way, beaten the market. NANC returned 37.5 per cent in the year to the end of March, outstripping the 29.9 per cent of the S&P 500, with better Sharpe and Sortino ratios — two measures of risk-adjusted returns.
KRUZ has done less well, making 25.4 per cent over the same period. However, it has beaten the 22.2 per cent return (with better Sharpe and Sortino ratios) of the Dow Jones Industrial Average, which Cooper argued was a fairer comparison given KRUZ’s radically different sector weightings and value stock-laden portfolio.
“NANC trades like the S&P and KRUZ like the Dow,” he said.
This view stems from the ETFs’ wildly different portfolios. The seven largest holdings in NANC are all technology-related companies, headed by Nvidia, Microsoft and Amazon.
Six of the seven are overweighted compared with the S&P 500, with Salesforce held at nearly eight times its market weight. The Democrat top 10 also includes cyber security company CrowdStrike Holdings and API Group, a provider of safety systems, neither of which are even in the S&P. API is also entirely absent from KRUZ’s 487-strong stock portfolio.
In contrast, the top holding in KRUZ is oil major Shell — nowhere to be seen among NANC’s 734 stocks — followed by industry peer ConocoPhillips, the 200th-largest holding in NANC. Chevron is also in KRUZ’s top 10, but 181st in NANC.
The stark divergence does not end there. Mid-cap industrial Comfort Systems USA is the third-largest position in KRUZ, with fellow mid-cap National Fuel Gas and low-profile energy services company NGL Energy Partners also in the top 10. None of these are anywhere to be seen in NANC.
“It’s truly astonishing how different they are,” said Cooper. “There are 1,200 names between the funds and the overlap between them is almost non-existent. It’s almost like a psychology test for a world view.”
KRUZ has just a 3.8 per cent exposure to the Magnificent Seven tech stocks, compared with their 28.7 per cent weighting in the S&P 500 and 35.6 per cent share of NANC.
“There is perhaps a moral aversion to investing in some of these companies [among Republicans],” Cooper said. “They are coastal companies, they are the global elites that are often maligned in the conservative media their world view gets filtered through.”
Bryan Armour, director of passive strategies research, North America at Morningstar, said “politically, there is a pretty clear line of demarcation on what types of companies fit within each party”.
“The Democrat version is 1 per cent energy where the Republican one is almost 14 per cent. Building materials and industrials are the same,” said Armour, who added that while he was not overly surprised “it makes no sense to me that you would invest differently dependent on your political beliefs”.
Cooper believed that each political tribe not only saw the world differently but also was positioning for their respective candidate to win November’s presidential election.
NANC’s portfolio is “very cloud-focused, tech-focused, the world is fine, we are going to get three [US interest] rate cuts this year. Everything is rosy. That is a world in which [Joe] Biden wins re-election,” he said.
“The world in which you don’t get rate cuts is diametrically opposed. If you think [Donald] Trump is going to win the election, in that world energy is going to outperform. There are going to be enormous tax breaks for assets like this, 100 per cent that is what is driving [KRUZ’s portfolio],” Cooper added.
And not only do Democrats and Republicans perceive a different future, they even see the present very differently.
“Our political divide is so stark and so insanely wide that liberals and conservatives literally do not even see the same economy,” Cooper said.
This ties in with data on economic sentiment. During the Trump presidency about 60 per cent of Republicans said they believed the US economy was getting better, while only around 10 per cent of Democrats did, according to data compiled by YouGov and The Economist.
However, by the time Biden took office in January 2021, economic sentiment among Republicans had plummeted while Democrats immediately started feeling better about the economy.
Cooper argued that each ETF’s outperformance against what he regards as their respective benchmark suggested the companies overweighted in both ETFs were materially better than the average listed firm.
“The wisdom of the crowd of Congress having the most access to information and choosing to own them is the secret sauce.”
Armour was unconvinced by Cooper’s suggestion that the Dow was a fair comparison for KRUZ, however. He also doubted whether NANC’s outperformance reflected any secret sauce.
“The reason it has done so well is because it’s very tech-heavy,” Armour said. “If the idea is to isolate some sort of insider knowledge, I don’t think this would be the way to do that. I don’t think there is an edge here.”
