Congressional Stock Trading Activity and Concerns
Many have been preparing for and watching the presidential debate this week, looking to see the impacts on the economy depending on which candidate wins. Despite that noise, early this week Morningstar posted an article of the two ETFs that have only been around a little over a year but have collectively beat the market through tracking members of congress stock trades who have access to insider information that retail investors like us don’t.
Since 2021, over 100 members of Congress have engaged in substantial stock trading, collectively making over 10,000 trades per year. Data on stock trading by members of Congress varies widely between sources. Capitol Trades reports 118 members made 11,491 trades in 2023 involving 751 million shares or assets, a decrease from 14,752 trades in 2022 but an increase in volume by 140 million shares. Unusual Whales found roughly 11,000 trades in 2023, down from 12,700 in 2022, with trades estimated to be worth over $1 billion, up from $788 million in 2022. Some other sites reporting Congress's stock trading activity as well as which members are buying which stocks include MarketBeat (Congress Stock Trades Tracker | MarketBeat.com) and Quiver Quantitative (Congress Trading - Quiver Quantitative)
The stocks most frequently traded by representatives and senators include well-known companies such as Microsoft, Apple, and Alphabet. Some members have made timely trades related to legislation they are involved in, for example they have the knowledge that they are going to grant a government contract that favors the company, so they buy it before the news goes public. This has raised concerns about conflicts of interest and potential insider trading. For instance, Nvidia was actively traded by members, including former House Speaker Nancy Pelosi, during the negotiation and voting on the CHIPS and Science Act. Other examples include trades made during the banking crisis of early 2023 and Sen.Tommy Tuberville trading corn futures while serving on the Agriculture Committee.
ETFs Tracking Congressional Trades Outperforming the Market
Two exchange-traded funds (ETFs) have been created to replicate the trades of members of Congress: the Subversive Unusual Whales Democratic ETF (NANC) and the Subversive Unusual Whales Republican ETF (KRUZ). These ETFs aim to leverage the trading data of Congress members to build portfolios, although their success depends on various factors, including the continued ability of Congress members to trade stocks and the effectiveness of the STOCK Act.
In 2023, Congress as a whole outperformed the market. Democrats achieved an average return of 31.18%, and Republicans saw a return of 17.99%, compared to the S&P 500's 24.23% return. Thirty-three members of Congress earned returns above the S&P 500. Democrats generally outperformed due to portfolios favoring tech stocks, while Republicans' portfolios, tilted towards financials, oil, and commodities, struggled due to the banking crisis and rising interest rates.
STOCK Act and Trading Rules
Members of Congress and their families can trade stocks as long as trades of $1,000 or more are reported within 45 days under the 2012 STOCK Act. There are no prohibitions against trading stocks of companies that may be affected by legislation they oversee. Insider trading laws apply, but information gained from their work might not qualify as insider information. Increasing scrutiny and public opinion have driven some members to draft legislation to ban congressional stock trading, though no such bills have passed committees or reached a vote.
A 2022 New York Times analysis revealed that nearly a fifth of elected representatives and senators made trades between 2019 and 2021 that could pose conflicts of interest based on their committee assignments. Notable trades included those made before the onset of COVID-19, the Silicon Valley Bank collapse, and the Ukraine-Russia war. Public support for a ban on stock trading by Congress members is overwhelming, with an 86% approval rate according to a 2023 Nielsen survey.
Risks and Considerations for Investing in Congressional ETFs
Democrats' portfolios lean towards technology and high-growth stocks, while Republicans also invest in technology but prefer energy, industrial, and financial companies. Both ETFs hold significant positions in Nvidia, reflecting its popularity among both parties. The Democratic ETF's performance has benefited from a heavier stake in high-growth stocks like Nvidia, Microsoft, and Apple. Below is an overview of the top ten holdings between each party/ETF currently.
Investing in these ETFs is speculative due to the various risks and uncertainties involved. The potential for new legislation to ban congressional stock trading could impact these ETFs significantly. While they offer a unique investment theme, they should be approached with caution, and investors should understand their portfolio characteristics and limitations. These ETFs aren't cheap either; the expense ratios for NANC and KRUZ are 0.76% and 0.83%, respectively. However, even if you used a balanced portfolio last year with NANC and KRUZ after expenses were taken you would still have beaten the market. KRUZ and NANC are relatively new investments in the market itself with a long back testing that produces positive performance, with a unique and well developed strategy, for producing returns.
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