Be skeptical of funds that invest like politicians: 'The smart money is not even in the same building'

Last year, a bipartisan bill seeking to ban members of Congress from trading stocks while in office fell short of a floor vote in the House. Lawmakers have since renewed efforts to restrict congressional stock trading on the grounds that legislators have access to information unavailable to the public.

Nancy Pelosi and Ted Cruz

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Nancy Pelosi and Ted Cruz

In the meantime, at least one fund company thinks that if you can’t beat ’em, join ’em.


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That’s the conceit behind two recently unveiled exchange-traded funds from Subversive Capital and investment data firm Unusual Whales.

One with the ticker symbol NANC invests in stocks purchased or sold by Democratic members of Congress and their spouses. The fund trading under the symbol KRUZ does the same for Republicans.

Generally, the further a fund deviates from a low-cost, indexed approach, the more you’ll have to dig in to determine if it’s a bit of clever marketing or something you want to hold in your portfolio as a legitimate investment, says Kenneth Lamont, senior manager research analyst for passive strategies at Morningstar.

“Being skeptical is really your first line of defense here,” he says. “This is a buyer-beware situation.”

In the case of investing like Nancy Pelosi or Ted Cruz, he says, you’d be wise to be extra wary: “The smart money is not even in the same building as these ETFs.”

Know what a fund holds, and what it costs

These are far from the only two ETFs on the market based on an out-of-the-box idea. Investors with a taste for quirkier ETFs can currently buy a breakfast-themed ETF that invests in coffee and hog futures, or one that hopes to benefit from the rise of the millennial consumer.

Whenever you’re considering this type of product, be sure to read the prospectus and examine the holdings to determine if a fund is delivering what it says. For all of its silliness, the idea behind the breakfast ETF stands up to some scrutiny. If more people spend money on breakfast, the likes of corn, wheat and orange juice futures could theoretically appreciate in price.

For an idea as complex as Congress allegedly profiting from inside information, it becomes more difficult to understand how an ETF can capture a market edge. Even if there was a measurable bit of outperformance congresspeople were enjoying, “it’s highly unlikely” that could be captured in the performance of an ETF, Lamont says.

Even if you’re compelled by the thesis, make sure you know what you’re paying for. Both Unusual Whales funds charge an expense ratio of 0.75%. The Democrat version of the ETF counts growth stocks Microsoft, Amazon, Apple, Alphabet and Salesforce as its top holdings. The Republican version skews toward large-company energy stocks.

“There are far cheaper ways to get that exposure than paying 75 basis points,” says Todd Rosenbluth, head of research at investment research firm VettaFI.

You can find a fund that tracks S&P 500 energy stocks that charges 0.10%. Several large-company growth ETFs charge 0.04%.

Don’t ride other investors’ coattails

Though they’re the first political funds of their kind, NANC and KRUZ are the latest in a long line of investor attempts to capture the performance of people they see as smarter or savvier investors.

Investing alongside lawmakers brings up a familiar set of problems. For one, it’s unclear whether congresspeople’s access to information has allowed them as a group to beat the market over time. In other words, it’s not clear whether they’re actually “better” investors.

And even if it were true, you may be too late anyway. Like strategies that try to mimic the returns of prominent investors such as Warren Buffett and Carl Icahn, these ETFs operate on information from public disclosures. That means the fund has to wait until 30 to 45 days after a trade has already been made to buy or sell a stock.

By then, who is to say whether you’ve captured any of the performance the better investors enjoyed?

Even more important, do you really want to?

“A 65-year-old member of Congress is probably buying a stock for very different reasons than people reading this article are,” says Rosenbluth. “You don’t want to ride the coattails of other supposedly smarter investors instead of buying a strategy fit for you individually.”

If you’re a long-term investor, the sort of investment that fits your strategy is likely a broad-market ETF with a low expense ratio, says Rosenbluth.

As for the funds whose strategies may catch your eye: “People need to go beyond a cool ticker. With any new ETF, dig in to understand what the rules are to determine it it’s a thesis worth participating in.”

Get CNBC’s free Warren Buffett Guide to Investing, which distills the billionaire’s No. 1 best piece of advice for regular investors, do’s and don’ts, and three key investing principles into a clear and simple guidebook.

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