Everyday stock investors can now mimic the stock trades of members of Congress with two new exchange-traded funds (ETFs) that launched on Tuesday.
The stock trading tool Unusual Whales and the Subversive Capital Advisor teamed up to roll out the two equity-based portfolios that are based on financial disclosures from members of Congress and their spouses—the Unusual Whales Subversive Democratic ETF and the Unusual Whales Subversive Republican ETF.
The ETF that tracks Democratic stock picks has the stock ticker NANC. The Republican ETF has the stock ticker KRUZ. Both funds were trading at about $25 when they launched on Tuesday.
The decision to launch the politically-themed ETFs came after members of Congress have drawn scrutiny for some of their stock trades. Unusual Whales found several lawmakers that beat the market with their trading activities in 2022. Financial disclosures showed Rep. Patrick Fallon (R-Texas) was the most successful trader in Congress in 2022, with returns of 52 percent on his stock investments. Rep. Debbie Wasserman Schultz (R-Fla.) was the second-most successful trader in Congress, with returns of nearly 51 percent on her investments.
“A quick online search shows how members of Congress perform relative to the rest of the market,” said Christian Cooper, who manages the portfolios for both ETFs. “Congress has outperformed the market and beat the SPY index in 2021 and 2022.”
The decision to launch these ETFs followed concerns that members of Congress have had such success in stock trading because they may have access to knowledge that is not available to the average consumer.
“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,” Cooper said.
Cooper told Bloomberg that NANC is geared toward investments in the technology sector while KRUZ is more heavily focused on energy and gambling stocks.
These new ETFs are not the first to attempt to replicate the investment activity of lawmakers. In March, investors launched an ETF with the ticker INSDR, which follows the trading patterns of some prominent lawmakers.
Potential Risks for Investors
While the two ETFs aim to closely follow Democratic and Republican stock trading activities, there are some risks to the investing strategy because there can be a potentially lengthy gap between when a lawmaker has made a financial transaction and when they are required to report that transaction.
The Stop Trading on Congressional Knowledge (STOCK) Act requires members of Congress to report any trades worth more than $1,000. Under the act, members of Congress have 45 days to disclose their trading activity.
Todd Rosenbluth, head of research at VettaFi financial consultants, told the Financial Times that “riding on the coat tails of people with different financial objectives and time horizons is a meaningful risk.”
“People should own what fits their needs and goals, not someone else’s,” Rosenbluth added.
While the STOCK act requires members of Congress to disclose trades of more than $1,000 within 45 days, Unusual Whales told Financial Times that back-testing had shown that the average time gap before congressional disclosure was between 10 and 20 days and has been shrinking.
Controversial Congressional Trades
Sens. Dianne Feinstein (D-Calif.), Kelly Loeffler (R-Ga.), Jim Inhofe (R-Okla.), and Richard Burr (R-N.C.) all came under scrutiny in 2020 for stock trades they made in the early days of the COVID-19 pandemic.
Burr sold stocks in the hospitality industry, which suffered heavy financial losses shortly thereafter as the pandemic hit.
Disclosures forms showed Feinstein sold between $1.5 million and $6 million in stock from a California biotech company called Allogene Therapeutics between Jan. 31 and Feb. 18, 2020.
Disclosures showed Loeffler sold between $1.3 million and $3.1 million in early January in stocks including the Exxon Mobil oil company and Resideo Technologies, which makes smart home products. Records also showed that Loeffler purchased up to $250,000 in stocks in Citrix, a company that sells software to assist people working from home.
According to Senate records, Inhofe sold up to $500,000 in stocks in PayPal and in a real estate company called Brookfield Asset Management.
Rep. Nancy Pelosi (D-Calif.) came under scrutiny last year over her husband Paul Pelosi’s purchasing and selling stocks of the chipmaker Nvidia. Those sales came before Congress passed the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act. Pelosi sold those stocks at a loss before the CHIPS Act passed, but Fox Business reported he avoided losing an additional 20 percent loss by trading the stocks in July, rather than after Congress passed the new law in August.
According to an investigation by Business Insider, at least 45 members of Congress have violated restrictions in the STOCK Act. Last year, Pelosi said she would support increasing penalties for those who violate the STOCK Act.
Last month, Sen. Josh Hawley (R-Mo.) introduced a new bill to ban U.S. lawmakers and their spouses from trading individual stocks altogether. Hawley titled the bill the Preventing Elected Leaders from Owning Securities and Investments (PELOSI) Act.
