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These ETFs Mix Politics With Investing

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They say never mix politics with investments, but that isn’t stopping Active Weighting Advisors from launching three ETFs that appear to do just that.

The GOP ETF — that’s GOP as a trading symbol, not an acronym for Grand Old Party — focuses on portfolios that are expected to benefit from Republican Party policies. The DEMS ETF is designed to do the same for securities that can potentially appreciate as a result of Democratic Party policies.

And TAXR provides exposure to companies that are expected to see the greatest benefit from “significant tax reform in the U.S.,” according to the press release from EventShares, which is the name of the ETF fund family managed by Active Weighting Advisors. 

(Related: Can Theme-Based ETFs Hack It in Portfolios?)

All three ETFs are actively managed, can invest in stocks and bonds based in the U.S. and elsewhere and can hold both short and long positions. They were introduced today holding long positions in about 30 stocks each though slight short positions will be added soon in the GOP and DEMS ETFs, according to Ben Phillips, chief investment officer of EventShares. The funds trade on the BATS exchange.

The portfolios will be rebalanced quarterly, but changes can be made more frequently if the portfolio manager deems it necessary. A fourth ETF, focused on a potential breakup of the European Union and trading under the EXIT symbol, is expected to be introduced in early 2018.

Phillips tells ThinkAdvisor that the firm “wants to give investors precise tools to capture policy themes” instead of the “blunt instruments” they have been using such as owning small caps as a way to capture companies that are expected to benefit the most from reform. (Since small-cap companies pay higher corporate rates than large-cap companies overall a corporate tax cut is seen by many to benefit those stocks the most.) The focus is on policies, not politics, says Phillips.

Asked about whether the ETFs are intended to reflect the odds of policy changes or the biases of the buyers, Phillips said they are designed to reflect “policies that are top of mind, moving through the lawmaking process” that can potentially impact markets in one or two years but also are in some cases over the next five to six years. The firm’s fundamental and quantitative analyses are focused on identifying the winners and losers stemming from policy changes. Phillips said advisors can consider the ETFs as investments for core or tactical portfolios.

Each portfolio is comprised of stocks divided into several themed buckets, which EventShares calls “sub-themes.”  For GOP, the buckets are deregulation, defense/border control, tax reform, energy independence and infrastructure. Its top three sectors, comprising 64% of holdings, are industrials, financials and energy.

For DEMS the subthemes are health care expansion, environmentally conscious, education, social good and financial reform. Its top three sectors, which account for 58% of holdings, are health care, technology and industrials.

The subthemes for TAXR are corporate tax cuts, U.S. exporters and capital expenditures, and the top three sectors are industrials, technology and consumer discretionary, accounting for 58% of holdings. Despite the overlap in sectors there is none among the top 10 holdings in each fund.

The GOP and DEMS ETFs have a net expense ratio of 75 basis points each; the tax reform ETF charges 85 basis points.

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