When It Comes to Politics and ETFs, If You Can't Beat 'Em, Join 'Em

"A Member, officer, or employee of the Senate shall not receive any compensation, nor shall he permit any compensation to accrue to his beneficial interest from any source, the receipt or accrual of which would occur by virtue of influence improperly exerted from his position as a Member, officer, or employee."

The passage in question is derived from the Senate Code of Official Conduct, which was created in 2015 as a response to the "Stop Trading on Congressional Knowledge Act of 2012", a.k.a. The Stock Act. The Stock Act aimed to ensure that members of Congress, like other individuals, would not be exempt from insider trading laws.

It's important to note that these rules do not outrightly ban trading for government workers. However, they establish a reporting framework that requires government traders to report their trades within a specific timeframe, typically ranging from 30 to 45 days.

This transparency requirement has led to the emergence of platforms such as Capitol Trades, which track these trades. Recently, Subversive ETFs and Twitter user Unusual Whales collaborated to create two ETFs, namely the Unusual Whales Subversive Democratic Trading ETF (NANC) and the Unusual Whales Subversive Republican Trading ETF (KRUZ).

Both NANC and KRUZ are scheduled to begin trading on Tuesday, appealing to individuals across the political spectrum who have an interest in financial gain. These ETFs feature a 75-basis point expense ratio, meaning that an investor with $1,000 invested in either fund over a year would pay $7.50 in fees.

The investment approach for these funds is based on reported trades made by registered Democrat or Republican members of Congress and their families. It is worth mentioning that the funds do not track trades by unregistered individuals or those affiliated with parties other than Democrats or Republicans. NANC holds 782 equity positions, while KRUZ holds 526. The two funds share 302 positions, providing approximately 40% exposure to KRUZ for NANC holders and 58% exposure to NANC for KRUZ holders.

One might assume that entering the market 30 to 45 days after the initial trade would result in missed opportunities for profit. Although some studies have questioned the effectiveness of tracking hedge fund reporting, the situation here differs because hedge funds often engage in "window dressing" by adjusting their portfolios specifically for reporting day. Additionally, it's worth noting that the required 13F reporting applies only to long positions and excludes short positions, currency, or commodity holdings.

In conclusion, given recent instances of insider trading by members of Congress, some argue for an outright ban on trading by these individuals. They suggest that assets should be placed in a blind trust, while any situation that creates a direct or indirect fiduciary duty over their own assets should be disallowed.

Considering the significant net worth of many public officials, it may be worth considering stricter regulations, especially if they are crossing the line of privileged information access. Meanwhile, individuals who can't overcome these challenges might find participating in NANC and KRUZ ETFs appealing.