How To Trade Like A Politician

How To Trade Like A Politician
Luke Suddards

over 1 year ago4 mins

  • Politicians have been in the spotlight recently for trading with questionable timing, which has done nothing to bolster the already low trust score of 19% from the American public.

  • Some examples include buying stocks right before key company announcements went public, offloading portfolios just before the Covid crash, and buying into companies that would benefit dramatically from the structural shifts brought about by the pandemic.

  • You could play this theme via the NANC and KRUZ ETFs that will soon be released, or do some DIY using a website called Capitol Trades.

Politicians have been in the spotlight recently for trading with questionable timing, which has done nothing to bolster the already low trust score of 19% from the American public.

Some examples include buying stocks right before key company announcements went public, offloading portfolios just before the Covid crash, and buying into companies that would benefit dramatically from the structural shifts brought about by the pandemic.

You could play this theme via the NANC and KRUZ ETFs that will soon be released, or do some DIY using a website called Capitol Trades.

Mentioned in story

With US midterms less than a month away, I couldn’t help but brood over the controversy surrounding major politicians’ trading patterns. Nancy Pelosi and her husband, to name a couple, have raised eyebrows with their impeccably-timed trades – especially given her very prominent position in US politics. Now I think about it, a more fitting name could be Nostradamus Pelosi.

Public trust in US politicians is fading fast

Common folk have been losing trust in US politicians for a while now: in fact, Pew Research found that public trust in politicians has dropped from a robust 75% in the 1960s to a puny 19% in 2022. And the numbers aren’t much better when you zoom in on trading: a Financial Times poll from this January signaled that 76% of the American public believe members of Congress and their spouses have an unfair edge, and only 5% supported them still being able to trade. In short, public sentiment toward trading politicians is more sour than a two-week-old lemon. That’s despite the Stop Trading On Congressional Knowledge (STOCK) Act being implemented in 2012, which sought to rebuild the ever-weakening trust deficit. The act essentially forces politicians and their families to publicly report any purchases or sales of stock with a value of over $1,000 in the last 45 days.

Still, a whole host of critics reckon that’s not enough, and think a wholesale ban on congressional trading is a necessary next step. But with the government up against a cacophony of pressing problems, any progress toward a more complete ban is likely a ways off. Looks like politicians are only too happy to trade away in the meantime: Congress members and their families racked up just over $350 million worth of stock trades in 2021, enough to get retail investors’ tongues wagging on apps like TikTok, Twitter, and Reddit.

So do politicians really have an edge?

Let’s take a look at some specific examples. Nancy Pelosi’s husband invested in chipmaker Nvidia just one month before news broke that the firm’s chips would be used in a US supercomputer. On top of that, he exercised options to get his hands on 25,000 Microsoft shares only a few weeks before it was announced that the tech giant would be teaming up with the US army, and he made another tidy profit. But this isn’t just a Democrat issue: two Republican senators were quick to sell their stocks right before the stock market meltdown of March 2020, prompted by private data that highlighted the seriousness of the pandemic. Then Senator Loeffler from the Republican party bought up Citrix stock, a company that would directly benefit from the pandemic-induced shift toward remote work. No wonder folk are losing their cool…

So what’s the opportunity then?

Two brand-new exchange-traded funds (ETFs) – set to hit the market imminently – are designed to offer politicians' trades straight to the public: NANC and KRUZ. The investment case is simple: politicians have privy information at their fingertips, and retail investors want in. The Pelosi-namesake NANC ETF will seek to replicate the returns of Democratic members of Congress and their family members. Meanwhile, KRUZ – a not-so-subtle nod to Republican Senator Ted Cruz – will track the equities held by Republican lawmakers and their families. According to the regulatory filing, each ETF plans to hold a portfolio of between 500 and 600 stocks. They’ll need to be actively managed to constantly and accurately reflect politicians’ fresh buys and sells, and all that manpower means the ETFs will have a fairly hefty price tag of a 1% expense ratio. Now, we haven’t yet been told how the ETFs will be weighted, but you could likely get a similarly diversified set of 500 or so stocks with the S&P 500 ETF for a fraction of the cost – just 0.03%. But remember: these ETFs will only give you exposure to stocks, not other assets like crypto and bonds.

Or you could get stuck into some good old-fashioned DIY: free-to-use website Capitol Trades tracks senators, representatives, and their family members’ market transactions. The nifty little site lets you filter by asset class, trade size, and political party, and you can even search for a certain politician or specific single asset. So mom-and-pop investors, this could be your opportunity to gain an edge by piggybacking off politicians’ trades.

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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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