Trump-inspired funds bring political twist to ETF market

The actively managed EventShares funds aim to track Republican, Democratic policies

Oct 18, 2017 @ 11:16 am

By Bloomberg News

Politics is always a gamble — and a couple of new exchange-traded funds are letting investors put real money on it.

Active Weighting Advisors launched two ETFs under the EventShares brand that seek to provide exposure to political and policy-driven ideas. The actively managed funds, called EventShares Republican Policies Fund (GOP), and EventShares Democratic Policies Fund (DEMS), employ hedge-fund-like strategies by taking long positions in companies that should benefit from party policies and shorting those that would be hurt.

These ETFs differ from the first politically themed fund, which started trading in September. Known by its ticker MAGA, the passively managed Point Bridge GOP Stock Tracker ETF follows companies whose employees and PACs are highly supportive of Republican candidates. The strategy is already paying off, as buyers have poured more than $30 million into the fund in less than six weeks.

"We are doing something very different than a new competitor out there that's passively managed and rebalancing every two years," said Ben Phillips, chief investment officer at EventShares. "And we're not limiting ourselves to large, often correlated names like the S&P 500 constituents."

Active management gives the funds a hands-on approach, which is essential during an administration that can be so "spontaneous," Mr. Phillips said. The managers won't be doing day-to-day substitutions, but if there is a major policy shift, they have the flexibility to swap companies, he said.

However, active management also makes the funds more expensive. The two EventShares ETFs have expense ratios of 75 basis points, compared with 65 basis points for MAGA.

Long and Short

The GOP ETF is focused on defense and border protection, deregulation, infrastructure and U.S. energy independence, and also has a bucket for tax reform. It owns companies like Cheniere Energy Inc., a U.S. natural gas transporter, because Mr. Phillips thinks it will benefit from potentially less stringent regulation on energy and transportation. The fund may short Kansas City Southern, a company that gets half its revenue from Mexico, whose stock plunged 11% the day after Mr. Trump won.

DEMS, on the other hand, focuses on health-care expansion, environmentally conscious companies, social good, education and finance reform. The fund holds a lot of health-care stocks like Molina Healthcare Inc. and Universal Health Services, and will short financials like Goldman Sachs Group Inc. and SLM Corp., better known as Sallie Mae, the student loan company.

A third EventShares ETF is the U.S. Tax Reform Fund (TAXR), which is more of a"tacitcal opportunity," Mr. Phillips said. It tracks companies that are expected to benefit from tax cuts and those that could gain from policies that help exporters. Unlike the other two EventShares ETFs, it will only take long positions initially and is a bit more pricey at 85 basis points.

While these funds may be unique for now, investors should expect to see more of them, according to Bloomberg Intelligence analyst Eric Balchunas, as there are likely to be other ETFs seeking to profit from the action in Washington.

"At the end of the day, it'll come down to performance, especially for independently issued ETFs that aren't connected to some giant distribution system," Mr. Balchunas said. "The only way out of the slums is crushing it. That's the key to even getting a look."

(More: Smart-beta ETFs take in billions in new assets)

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