One of the most notable winners from the surge in Nvidia Corp. (ticker: NVDA) shares, driven by the ongoing artificial intelligence, or AI, arms race, was former House Speaker Nancy Pelosi.
In December 2023, Pelosi disclosed an earlier transaction made on Nov. 22, when she opted to go long on 50 Nvidia call options with a strike price of $120 set to expire on Dec. 20, 2024. But to fully understand the significance of this trade, it’s essential to grasp a few key concepts about options trading.
Each call option contract typically represents the right to buy 100 shares of the underlying stock at a predetermined price, known as the strike price, before the contract expires. Therefore, by purchasing 50 call options, Pelosi effectively controlled the right to buy 5,000 shares (50 options x 100 shares per option) of Nvidia, therefore giving her leverage with a smaller outlay of capital.
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The strike price of $120 is particularly noteworthy because it was well below Nvidia’s trading range of $476.90 to $503.35 on the day of the transaction. An option is considered “in the money” (ITM) when the strike price is below the current market price of the underlying stock for call options.
Being ITM means the option has intrinsic value, as the holder can buy the stock at a price lower than the market value. Essentially, Pelosi’s choice of an ITM strike price amplified the potential profitability of her investment, given Nvidia’s strong performance and upward trajectory in the stock market at the time. By being in the money though, it also provided a degree of downside protection that out-of-the-money options can’t provide.
Following another impressive earnings report, Nvidia’s shares soared to $788.17 on Feb. 23. While the precise profit Pelosi garnered from this trade remains undisclosed, the leverage inherent in call options likely resulted in a substantial return.
For retail traders looking to mimic the investment moves of Pelosi and other U.S. lawmakers, there are, in fact, two ETFs designed specifically for this purpose: the Subversive Unusual Whales Democratic ETF (NANC) and the Subversive Unusual Whales Republican ETF (KRUZ).
Both ETFs, sub-advised by Subversive Capital Advisor LLC and using data from Unusual Whales, actively track stock trades made by members of Congress, having launched on Feb. 7, 2023.
Here are the top three things you need to know as an investor before considering an investment in either NANC or KRUZ:
— The regulations behind Congressional stock trading.
— How NANC and KRUZ work.
— What experts think about NANC and KRUZ.
The Regulations Behind Congressional Stock Trading
Unlike retail investors, members of Congress are subject to specific regulations when it comes to their investment activities, thanks to the Stop Trading on Congressional Knowledge, or STOCK, Act.
This legislation was designed with the intent to prevent insider trading and ensure transparency in the financial dealings of Congressional members. In short, the STOCK Act mandates that public officials cannot use material, non-public information for personal gain in the stock market.
To illustrate why such legislation is necessary, consider a hypothetical scenario where a member of Congress learns about an upcoming military procurement contract that would significantly benefit a particular publicly traded defense company before this information becomes public knowledge.
Without the STOCK Act, that member could potentially buy shares or options in the company secretly to pre-emptively profit from this insider knowledge, which would be unfair to the general investing public, which does not have access to such information.
“The access Congressional members have through legislative activities can influence stock prices, akin to insider trading,” says Sean August, CEO of the August Wealth Management Group. “A lack of legal consequences for such actions undermines market fairness.”
Central to the STOCK Act is the requirement for Congressional members to file periodic transaction reports, or PTRs. These reports provide a public record of their investment activities, making it possible for their financial transactions to be scrutinized by the public and regulatory bodies.
Now, PTRs come with specific filing deadlines to ensure timely disclosure. A Congressional member must file a PTR within 30 days of becoming aware of a transaction or 45 days from the date the transaction occurred, whichever comes first.
This filing delay is designed to balance the need for transparency with the practicalities of busy schedules and administrative processes. However, it also means there is a lag between when transactions occur and when they are disclosed to the public, which is a critical aspect for investors using PTRs as a basis for making investment decisions.
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How NANC and KRUZ work
NANC and KRUZ offer retail investors the ability to track Congressional stock picks by leveraging the aforementioned PTRs. Both ETFs were launched in February 2023, with an initial basket of stocks chosen based on PTRs filed over the preceding three years.
Since their inception, NANC and KRUZ have dynamically adjusted their holdings to reflect ongoing Congressional trades, aiming to maintain a portfolio of 500 to 600 stocks each. Importantly, they only track PTRs from members’ terms in office, ensuring relevance and timeliness in the selections.
Currently, both ETFs operate under a 0.75% expense ratio, reflecting the cost of actively tracking Congressional trades. This expense ratio is significantly higher than the average broad market index ETF, but in line with other actively managed thematic ETFs on the market.
But despite their similarities, the ETFs differ significantly in their portfolios, reflecting the divergent investment philosophies attributed to Democrats and Republicans. Christian Cooper, portfolio manager at Subversive Capital, explains this as “Democrats hold ideas, while Republicans hold things,” a distinction that’s evident in their top holdings.
NANC’s portfolio is concentrated in technology and growth stocks, including Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Nvidia and Alphabet Inc. (GOOG, GOOGL). This focus on sectors that benefit from the AI boom aligns with a growth-centric investment philosophy.
Conversely, KRUZ exhibits a preference for value stocks across a broader range of sectors. Its top holdings include ConocoPhillips (COP), Shell PLC (SHEL) and Chevron Corp. (CVX). This mix points to a strategy favoring stable earnings and established but out-of-favor industries, characteristic of a value-centric approach.
Since their inception, NANC has notably outperformed KRUZ, delivering a return of 22.9% compared to 11.3% for KRUZ, largely due to the former’s significant position in technology and growth stocks, which have excelled in 2023. In contrast, KRUZ’s higher allocation of energy sector and value picks have lagged.
“NANC’s better performance can be explained by its higher weighting to hot tech sectors like software, internet, computers and semiconductors, versus KRUZ’s top sectors, which include retail and oil and gas and lower weightings to software and semiconductors,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital.
What Experts Think About NANC and KRUZ
Beyond the immediate benefits for investors in NANC and KRUZ, Cooper believes the operation of these ETFs could serve as a catalyst for increased regulatory and public scrutiny of congressional trades and the behavior of Congress members.
“Much like Schrödinger’s cat, where the act of observation can change outcomes, I think that NANC and KRUZ may change congressional behavior,” he explains.
Cooper further highlights a shift observed by Unusual Whales since 2020: “Congressional trading behavior has not changed, but their disclosure time has almost been cut in half from an average of 59 days before 2020 to 29 in 2023.”
However, not all investment experts share Cooper’s optimism regarding the benefits of these ETFs, particularly concerning the outcomes for investors.
“Successful investing typically employs a long-term approach based on fundamental analysis and diversification; thus, mimicking the short-term trading activities of members of Congress may not align with your investment principles and could lead to anomalous outcomes,” Schulman notes.
While he finds both ETFs interesting, Schulman also expresses skepticism about the long-term execution of their strategy, pointing out several potential issues, including the delay in PTR filing and the ETFs’ rebalancing response to these filings.
“Furthermore, since the ETFs seem to rebalance based on the size of trades, wealthier politicians may have more of an undue influence than less wealthy politicians because more affluent politicians may naturally trade more stock and in higher valuations,” he says.
August concurs with Schulman’s cautious stance, noting: “While the concept is intriguing, timing is crucial for maximizing returns and mitigating risk. I will continue to monitor ETFs like NANC and KRUZ, but until real-time disclosures are a requisite, retail investors should refrain from heavily relying on emulating congressional trades.”
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2 ETFs for Tracking Congressional Stock Picks originally appeared on usnews.com
Update 02/27/24: This story was previously published at an earlier date and has been updated with new information,
