There’s a saying, “you can do anything but don’t get caught.” Insider trading fits this mold perfectly. While safeguards exist to prevent insider trading, there will always be cases that slip through the cracks. Low crime doesn’t mean no crime. Insider trading is particularly lucrative because one can capitalize on privileged information before it becomes public – buying before a significant price jump or selling before a stock tanks. Preventing insider trading that benefits the few at the expense of the many is crucial to maintaining a fair market.
One of the most glaring issues with insider trading involves politicians. They are often privy to significant market-moving information. In 2012, the U.S. enacted the Stop Trading on Congressional Knowledge Act, commonly known as the STOCK Act, to prevent politicians and government officials from using non-public information for personal financial gain. Under this law, insiders must disclose their trades within 45 days of the transaction and face penalties and disciplinary action if they fail to do so.
However, in practice, there have been numerous violations of the 45-day reporting deadline. Most of these violations result in minimal fines, sometimes as low as $200, or no penalty at all, highlighting clear enforcement issues.
Unusual Whales, a financial data platform, publishes the performance of trades made by members of Congress each year. Most have consistently outperformed the S&P 500 index, suggesting that politicians may indeed have an informational advantage over the public. Below is one such example, showing the performance of individual congressional investment returns in 2023:
“If we can’t beat them, join them.” While it may seem ethically questionable to profit from potential wrongdoing, one could argue that once these trades are disclosed publicly, they become fair game for investors. By following them, investors are technically still playing by the rules.
Fortunately, investors don’t need to sift through disclosed trades manually. Subversive has partnered with Unusual Whales to launch two ETFs that track congressional trades: the Subversive Unusual Whales Democratic ETF (NANC) and the Unusual Whales Subversive Republican ETF (KRUZ).
Both ETFs are relatively new, launched on February 7, 2023, with just 1.5 years since inception at the time of writing. NANC is the more popular of the two, with $162.5 million in assets, while KRUZ has just $33 million in assets.
This difference in popularity is unsurprising given their performance. NANC (Democrats) has achieved a year-to-date return of 19.95%, outperforming both the S&P 500 ETF (SPY) and KRUZ (Republicans), which returned 19.17% and 11.55%, respectively.
One key reason for NANC’s outperformance could be its larger exposure to Big Tech, which has performed well this year.
KRUZ’s top 10 holdings don’t resemble the index and include only Nvidia among Big Tech, with a weighting of just 3.04% compared to NANC’s 11.3%.
Given the short period since their inception, it’s too early to determine whether NANC and Democratic investors are ‘better.’ A more prudent approach would be to hold both ETFs if one wishes to coattail politicians’ trades.
Some investors may balk at the 0.75% expense ratio for these ETFs. However, this fee is reasonable when compared to the time and effort required to manually dig through trades published by the Senate Office of Public Records or the Clerk of the House of Representatives. Not to mention the added effort of placing trades and incurring commissions. Buying these ETFs saves time and effort.
In conclusion, these ETFs show potential, though more time is needed to assess their long-term performance. One concern is that the trades, while publicly disclosed, are done so with a delay, meaning the ETFs may not perfectly capture the trades. Any enhancement or tightening of the STOCK Act would be beneficial, such as shortening the reporting window to allow investors to capitalize on ‘insider’ moves more quickly, potentially leading to higher returns.
