Not All ETFs Are The Same: Here Are Some Of The Stranger Ones

Not All ETFs Are The Same: Here Are Some Of The Stranger Ones
Russell Burns

about 1 year ago4 mins

  • In investing, you always want to find alpha, a return that’s above and beyond that of the benchmark index. And there are always new ETF launches that try to achieve that.

  • Among the more interesting ones are two that are designed to replicate the trades of US politicians, who do seem to achieve that alpha.

  • And other newly launched ETFs seek to take advantage of the “night effect”, the tendency for stocks to do better after and before trading hours.

In investing, you always want to find alpha, a return that’s above and beyond that of the benchmark index. And there are always new ETF launches that try to achieve that.

Among the more interesting ones are two that are designed to replicate the trades of US politicians, who do seem to achieve that alpha.

And other newly launched ETFs seek to take advantage of the “night effect”, the tendency for stocks to do better after and before trading hours.

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The world’s five biggest ETFs, with some $1.3 trillion under their collective belts, all do exactly the same thing: they invest in US stocks by passively tracking the market. But set those index trackers aside, and there’s a lot more to the $10 trillion US ETF market. It’s got just about everything you could want – investments based around sectors, themes, and so on. Plus, new and sometimes unusual stuff is added all the time. Here are some oddball launches that caught my attention in the past year or so…

The political whales

The Unusual Whales Subversive Democratic Trading ETF (ticker: NANC; expense ratio: 0.75%) and the Unusual Whales Subversive Republican Trading ETF (KRUZ; 0.75%) are exchange-traded funds that allow you to invest alongside members of Congress and their spouses (and their children). It’s a way to profit off of a highly controversial – but still legal – situation, in which members of Congress and their families are allowed to trade individual stocks, even based on information that’s not yet been disclosed to their constituents.

Unusual Whales is a data and options platform that tracks (among other things) out-of-the-ordinary trades resulting in huge investment gains for US politicians. The group started the ETF with the aim of either stopping elected officials from being allowed to trade stocks or – short of that – allowing retail investors to profit from the controversial practice.

Here’s how it works: members of Congress are required to disclose any investments they make within 45 days of the transaction, by the Stop Trading on Congressional Knowledge Act (“STOCK Act”). Not all comply, of course, but these two ETFs at least allow investors to closely copy the trades they disclose.

What are the risks?

There are 2 ETFs – the one that tracks Democrats’ trades bears the ticker NANC, for former House Speaker Nancy Pelosi, while the one that tracks Republicans’ trades bears the ticker KRUZ, for US Senator Ted Cruz. These ETFs, both launched about a month ago, currently only have around $10 million in total assets between them.

verage congressional stock returns in 2022. Source: Unusual Whales.
verage congressional stock returns in 2022. Source: Unusual Whales.

There seems little doubt that members of Congress outperform the market. So far these ETFs have turned in a mixed performance: the Republican ETF has been outperforming the S&P 500, but the Democratic ETF has been underperforming. It’ll be interesting to see how they will have performed by the end of the year.

KRUZ and NANC performance since inception. Source: Bloomberg.
KRUZ and NANC performance since inception. Source: Bloomberg.

But a key drawback, it seems to me, is the delay in disclosures for the trades made (up to 45 days). So, when the ETF makes the trade, the entry or exit price may be materially different, compared to the price those elected members got. The ETFs will also have higher turnover than a more passive approach would have, and increased transaction costs will likely impact its performance.

Average congressional stock returns in 2022. Source: Unusual Whales.
Average congressional stock returns in 2022. Source: Unusual Whales.

The night owls

The market’s got some nocturnal tendencies. Research shows that stocks actually perform better after hours than they do during the more volatile day sessions. They call it the “night effect”, and it impacts small-cap stocks even more than large-caps, in both bull and bear markets. And there’s a new batch of ETFs called “NightShares” that seeks to try to profit from it.

There are currently three different NightShare ETFs: the NightShares 2000 ETF (NIWM; 0.55%), the NightShares 500 ETF (NSPY; 0.55%), and the NightShares 500 1x/1.5x (NSPL; 0.75%).

The 2000 ETF will give you exposure to the night sessions of small-cap companies, and the 500 ETF will give you exposure to large-cap ones. The 500 1x/1.5x, meanwhile, will give you exposure to large-cap companies during both the day and night sessions but increases your exposure to the night session by 1.5x (or 150%). The fund’s managers use liquid equity index futures, which helps keep trading costs down. This trio of ETFs was listed in October, so they’re still relative newbies and have only around $22 million of assets between them.

What are the risks?

Although the historic data proves the positive returns-making performance of the night effect, so far the performance of these ETFs has been more mixed.

The performance since the launch of the three NightShares ETFs. Source: Bloomberg.
The performance since the launch of the three NightShares ETFs. Source: Bloomberg.

Until the end of last year, the NightShares ETFs were outperforming their respective benchmarks (the S&P 500 and Russell 2000). But, since roughly the end of January, the “pure” night-focused ETFs, NightShares 2000 ETF (yellow line), and the NightShares 500 ETF (orange dotted line) have fallen more.

Meanwhile, the NightShares 500 1x/1.5x (white line), which has exposure to both the day (1x) and night (1.5x) sessions – a more hybrid approach – performed better (at least until recently). In recent weeks, it’s been underperforming the S&P 500, and that’s a bit disappointing. Despite the research showing the night effect is positive in both bull and bear markets, recent data suggests the night effect is more positive in a more bullish market.

Still, the NightShares 500 1x/1.5x may be the best of the three: it’ll give you exposure to the S&P 500’s day and night sessions – with a heavier lean on the overnight session, but without missing out entirely on the daytime market hours.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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