Money managers have already tried to sell people exchange-traded funds linked to booze and over-eating. So it probably shouldn’t come as a shock that they’re moving on to an even touchier region of the American psyche -- politics.
Believe it or not, not everyone thinks it’s a great idea.
Take the U.S. Tax Reform Fund, ticker TAXR, from Active Weighting Advisors’s EventShares brand. It tracks companies that will supposedly benefit from tax cuts and policies that help exporters. The ETF, whose top holdings include Copart Inc., Magellan Health Inc. and Caleres Inc., has lured about $5 million in market cap, still tiny by industry standards.
Funds from the same manager purport to give exposure to political and policy-driven ideas. The actively managed EventShares Republican Policies Fund, ticker GOP, and EventShares Democratic Policies Fund, symbol DEMS, employ hedge-fund like strategies by going long companies that may benefit from party policies and shorting those that could be hurt.
“We believe that policy can drive market returns, particularly in politically sensitive times such as today,” said Ben Phillips, chief investment officer at EventShares.
Sponsors can bill an ETF however they want, back test the results, and see how it behaves in various scenarios. They may even convince people to buy them. At the same time, the bar to proving such products work as advertised is pretty high. Getting even a rough sense of how governments influence share prices is a task fraught with peril, as anyone who shorted British companies since the Brexit vote can attest.
Fool’s Errand
“Aligning yourself with one of these causes because you think it’s going to outperform is a fool’s errand,” said Dana D’Auria, director of research at Symmetry Partners LLC, which oversees more than $8.5 billion. “We live in a time where people can leverage their investments to make a statement. Just make sure you’re well diversified because the hit you potentially take for this choice is worse than you might think.”
The GOP ETF is focused on defense and border protection, deregulation, infrastructure, U.S. energy independence and also has a bucket for tax reform. It owns companies like Cheniere Energy Inc., a U.S. natural gas transporter, because Phillips thinks it will benefit from potentially less stringent regulation on energy and transportation. The fund may short Kansas City Southern, a company that gets half its revenue from Mexico and whose stock plunged 11 percent the day after Trump won.
DEMS, on the other hand, focuses on health-care expansion, environmentally conscious companies, social good, education and finance reform. The fund holds a lot of health care stocks like Molina Healthcare Inc. and Universal Health Services Inc., and will short financials like Goldman Sachs Group Inc. and SLM Corp., better known as Sallie Mae, the student-loan company.