New ETFs allow investors to mimic how lawmakers trade stocks

Emulating the stock-trading patterns of politicians has become a niche activity online, but two new financial offerings want to take it to the next level — while also drawing attention to the controversial issue of lawmakers who trade stocks.

Two ETFs went live on Tuesday, allowing investors to put money behind a portfolio that approximates the holdings of Capitol Hill lawmakers.

The two new funds are boldly named NANC and KRUZ to track Democratic and Republican holdings. This week's rollout could also heighten the calls to ban lawmaker stock trading with the products premised on the idea that Congress members have more information than the average investor and often outperform the market.

“This is something that someone can actually own, that’s the difference,” said Subversive Capital Portfolio Manager Christian Cooper of how his offering is distinct. And while he isn't holding his breath for action in Washington, he would welcome it if this fund spurred lawmakers to ban trading, saying “the value of restoring trust” in Congress outweighs his business objectives here.

But in the meantime, he seems poised to do quite well.

“It was a monster launch, there's no other way to put it,” Cooper said during a Yahoo Finance Live interview on Wednesday.

The fund is the result of a partnership between his firm and Unusual Whales, an information platform that has been gathering data on politicians' stock trading for years. The two actively managed ETFs were formally listed on Tuesday on the Cboe BZX Exchange with Cooper acting as portfolio manager.

A recent detailed report from Unusual Whales found that 131 members of Congress filed financial disclosures in 2022 and, as a whole, beat the S&P 500 in terms of total returns.

A window into the ‘philosophical differences on both sides of the aisle’

NANC and KRUZ reflect data culled from lawmakers' required periodic transaction reports and financial disclosures. A 2012 law called the Stop Trading on Congressional Knowledge (STOCK) Act requires lawmakers to disclose trades within 45 days and annual financial disclosures reveal additional financial information.

“I think of the Democratic side as holding ideas and the Republicans as holding things,” said Cooper, noting "the philosophical differences on both sides of the aisle."

The data reveals that the top Democratically held stocks are indeed heavy on technology and media with liberal lawmaker portfolios dominated by Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Apple (AAPL), Salesforce (CRM), NVIDIA (NVDA), and Walt Disney (DIS).

House Speaker Emerita Nancy Pelosi (D-CA) doesn’t trade stocks herself, but the frequent activities of her husband, Paul, have long gotten notice. Just recently, he sold 30,000 shares of Google just weeks before the Justice Department filed a lawsuit against the company. The former Speaker says that her husband’s trades are not based on any inside information he receives from her.

Republicans' portfolios differ greatly from their colleagues and are much more focused on things like energy companies with Magellan Midstream Partners (MMP), Microsoft (again), Energy Transfer (ET), Dow Chemical (DOW), Philip Morris (PM), and Shell (SHEL) topping that list.

While a strong advocate for the energy industry, Sen. Ted Cruz (R-TX) himself doesn’t trade often. His only disclosed activity in the last three years was the purchase of Bitcoin (BTC-USD) in 2022. In previous years, his family has had minimal activity, including the sale of some stock in Goldman Sachs (GS) where his wife, Heidi, works as a managing director.

Representatives for Cruz and Pelosi, the namesakes for the new funds, didn’t respond to requests for comment.

Meanwhile, lawmakers are making another run this year to ban lawmaker trading with 50 legislators currently signed on to lead the effort. In the past, Cruz has discussed the need for a ban, while Pelosi was more skeptical of efforts before opening the door to a push late last year as she wound down her time as speaker.

For his part, Cooper said he see's a "zero percent" chance that lawmakers ban trading. What he's hoping for instead are greater restrictions, such as a shorter reporting window between when trades happen and are publicly disclosed — perhaps as short as one week. He also wants bigger fines for lawmakers who miss those disclosure deadlines.

Will they beat the market in 2023?

While the new ETFs don't have a track record yet, the top stocks on the respective lists tell a story of differing fortunes in 2022.

The Democratic lawmakers' focus on tech wasn’t a good investment in 2022 with the top five stocks in that ETF all down over the last 12 months. Amazon, which is heavily represented in Democratic portfolios, was down the most dramatically, falling by more than a third over the last year.

The Pelosi family didn’t escape the tech washout, having “a terrible year” on 2022, according to the Unusual Whales report.

By contrast, Republicans appear to have done much better with high energy prices leading to record profits and high returns. Magellan, the top stock in GOP portfolios, is up 8% over the last 12 months.

The one bipartisan stock is Microsoft, represented at the top of the portfolios of both parties. But even the both-sides-of-the-aisle support isn’t helping; its stock is down almost 15% over the last year.

Whatever the returns, what Cooper wants is for the fund to drive attention to the broader issues at play including a lack of trust in Congress and ongoing political divisions.

“It has nothing to do with either Nancy Pelosi or Ted Cruz to be honest,” he said.

Ben Werschkul is Washington correspondent for Yahoo Finance.

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