By Mark Hulbert
Given how polarized Americans have become, it perhaps was inevitable that Wall Street would get into the act.
Yet you shouldn’t believe that by investing according to your political party affiliation that you will beat the market. Over the long-term you almost certainly will not — politics do not guarantee stock-market profits.
Despite that, at least three exchange-traded funds now cater to investors’ politican partisanship:
American Conservative Values Fund /zigman2/quotes/222210382/composite ACVF -1.30% . According to this ETF’s website , the fund is an “actively-managed diversified large-cap core ETF seeking to boycott as many companies hostile to conservative values as possible.”
Democratic Large-Cap Core Fund /zigman2/quotes/222330456/composite DEMZ -1.20% . This ETF’s website says that the fund is “designed to provide similar risk and performance as the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.44% but it only includes companies that have made over 75% of their political contributions to Democratic causes and candidates.”
Point Bridge GOP Stock Tracker ETF /zigman2/quotes/209486822/composite MAGA -1.08% . According to this ETF’s website , the fund “is made up of 150 companies from the S&P 500 Index whose employees and political action committees (PACs) are highly supportive of Republican candidates.”
The chart above shows how each of these ETFs has performed since inception, relative to the S&P 500. The chart’s calculations take dividends into account. Before you make too much of DEMZ’s positive alpha, note that it is not statistically significant.
Expected returns are negative
You shouldn’t be surprised that MAGA’s and ACVF’s alphas are negative, and that DEMZ’s is insignificantly positive. That’s because there is a long-term cost associated with any non-investment-related restriction on the list of stocks from which they can choose.
Here’s why: If either Democratic or Republican values really did lead to market-beating performance, then Wall Street managers of both political parties would long ago have wasted no time investing in companies that manifested those values. Investment managers are some of the most hyper-competitive people you’ll ever meet, willing to do almost anything to gain even a basis-point advantage over their rivals. If a manager who votes for Democrats saw an advantage in investing in “Republican” companies, he would swallow his political pride and immediately do so. The same is true of Republican-voting managers.
A great example of managers’ corner-cutting was provided in a landmark study two decades ago in the Journal of Finance : “ Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds .” Its authors were Mark Carhart of Kepos Capital; Adam Reed of the University of North Carolina at Chapel Hill; Ron Kaniel of the University of Rochester; and David Musto of the University of Pennsylvania.
The researchers found that mutual funds in contention to be at the top of the performance sweepstakes for a given quarter or year will place buy orders on the stocks they already own minutes before the close on the last trading day of that quarter or year. Their intent is to boost the prices of those stocks and thereby artificially inflate their returns.
The most these partisan ETFs can expect is that their average stock does no worse than the overall market. Even if they achieve this already modest goal, their alpha over time will be negative to the tune of their not-inconsiderable expense ratios: More than 0.70% for both ACVF and MAGA, and 0.45% for DEMZ.
I have no desire to discourage you from investing in any of these politically-partisan ETFs. I’m in favor of letting your portfolio be invested in ways that are consistent with your values. At the same time, it’s magical thinking for an investor to believe it’s possible to do good and do well at the same time. Furthermore, it’s an insult to think we would only invest according to our values if we get paid for it. That’s putting an extremely low price on values.