Cashing in, bigtime? When politicians trade on the stock market

Stock-market dealings by US politicians have repeatedly made headlines in recent years. Although congressional members have been barred from trading on non-public information since 2012, securities transactions fraught with conflicts of interests are still business as usual on Capitol Hill. New ETFs now enable investors to tap into the purported knowledge advantage in the Capitol. Is that a judicious strategy?


Clear rules…

There are clear rules governing insider trading: stock trades based on non-public information that could influence a share price (e.g. non-public information about new products, litigation, or mergers and acquisitions) are strictly prohibited. There are also additional stringent transparency regulations for corporate insiders. CEOs in the USA, for example, must report their personal trading in equity shares or stock options in the respective companies they run to the US Securities and Exchange Commission (SEC) within two days, and such trading is completely prohibited during designated blackout periods (e.g. prior to the release of quarterly earnings reports). Many companies voluntarily self-impose even stricter regulations and make employees’ personal trading contingent on prior approval by the compliance department or the supervisory board. Comparable disclosure obligations exist in Europe as well. Corporate executives in Switzerland must report their personal trading in their companies’ own shares to the SIX Swiss Exchange within two days, and in Germany C-suite executives have three days to report to the Federal Financial Supervisory Authority (BaFin).


Blue leading red | Solid start for Democrats’ favorites


Sources: Bloomberg, Kaiser Partner Privatbank


…but apparently not for everyone

US congressional members, too, have been barred from engaging in insider trading since 2012. The Stop Trading on Congressional Knowledge (STOCK) Act additionally requires members of Congress to disclose any securities trades within 45 days of the transaction. However, this hasn’t deterred some politicians from trading. Roughly one in four congressional members regularly trades securities, according to the Unusual Whales platform, which keeps a tab on trading action on Capitol Hill. Some “star traders” even seem to concern themselves more with Wall Street than Main Street. House Democrat Ro Khanna, for instance, made 5,800 individual stock-exchange transactions last year for a total trading volume of USD 151 million. House Republican Michael McCaul made a whopping USD 180 million worth of trades in 2022. Some Congress members, though, don’t take the existing rules all that seriously. Instances of congressional members disclosing their trading activity incompletely, far too late, or not at all arise again and again. However, the paltry USD 200 fine for violations really isn’t much of a deterrent, and it is rarely enforced by the Senate and House ethics committees.

Institutionalized corruption?

It’s only natural in Washington D.C. that confidential information is almost constantly in circulation in conversation with interest-group spokespersons and lobbyists, for example, or during the legislative process. The temptation to use this knowledge to one’s own advantage appears to be too strong for some representatives of the people to resist. Most of those who engage in stock-market transactions fraught with conflicts of interests fly below the public’s radar. Disclosure requirements have done little to change that thus far. But there is always a big public outcry and a thunderstorm of headlines in the media whenever the alleged self-enrichment is devoid of even a modicum of ethics. North Carolina Senator Richard Burr, for example, came under scathing criticism in 2020 when he, in his position as the chairman of the Senate Intelligence Committee, sold USD 1.7 million worth of personal stock holdings shortly after having received a private briefing on the dangers of the novel coronavirus. Similar irregularities occurred shortly before the outbreak of the armed conflict in Ukraine, when more than a dozen Congress members’ preternatural purchases of shares in arms manufacturers and oil companies drew public attention.

The New York Times last year exposed just how widespread the self-enrichment mentality really is among US politicians. The Gray Lady reported that during the years 2019 through 2021, more than half of all Congress members active on the equity market engaged in stock trades involving conflicts of interests. The New York Times found fault with a total of 3,700 trades by 97 congressional members. Political initiatives aimed at tightening the existing rules get launched time and again – by both parties. One proposal, for example, envisages requiring congressional members to hold stocks, bonds, and other securities in a blind trust, i.e. in a portfolio over which an independent trustee has full discretionary control. A bipartisan congressional group recently even called for a total ban on trading. But it remains to be seen whether Democrats and Republicans will actually pull together in the end to deprive themselves of this lucrative source of income.

It can’t be definitively determined how good stock-market instincts are on Capitol Hill, in part because any calculations must have a big disclaimer attached to them and must be taken with a grain of salt.

More than a Midas touch

Data attest that trading with a certain knowledge advantage is indeed downright profitable for more than a few congressional members, or at least it was over the last two years. The analysis by Unusual Whales of all US Congress members’ disclosed trades executed last year reveals that the legislators significantly outperformed the US stock market. Whereas the S&P 500 index shed a good 18% of its value in 2022, actively trading Republicans posted a gain of 0.4% while Democrats settled for a small loss of just 1.8%. In 2021 as well, which was a good stock-market year that saw the S&P 500 register a double-digit percent gain, politicians beat the market slightly with an extra return of 1.2 percentage points. The evidence, however, is ambiguous. A study by Dartmouth College of a much longer period from 2012 through 2020 came to the conclusion that stocks purchased by congressional members do not out- or underperform other stocks on average. It can’t be definitively determined how good stock-market instincts are on Capitol Hill, in part because any calculations must have a big disclaimer attached to them and must be taken with a grain of salt. This means that all performance figures can only be rough estimates at best because the disclosure requirements stipulated by the STOCK Act as they currently stand lack the necessary depth of information. Neither the precise trading volume (only a vague dollar range instead) nor the itemized purchases and sales involved or the outcome (profit or loss) have to be disclosed in detail at present.


Copycat ETFs: Not advisable to mimic

Nevertheless, politicians’ stock-market transactions are very popularly viewed as a guidepost for spotting potentially fishy but at the same time lucrative trades. Meanwhile, there is now even a dedicated Instagram channel that continually tracks such transactions. The Unusual Whales platform, however, has gone a step farther and has teamed up with the asset management firm Subversive Capital Advisor to launch two ETFs that claim to replicate the securities positions of Democrats (ticker symbol: NANC) and Republicans (KRUZ). Not surprisingly, the “blue” ETF is on the tech-heavy side while the “red” ETF contains energy companies, but also gambling-industry stocks. With only around a three-month track record, these products’ performance history is not meaningfully informative yet. But it’s questionable anyway whether they will be able to beat the broad market in the future on the back of their purported inherent information advantage. That’s because the disclosure requirements thus far are very fuzzy, as described above. Moreover, the long deadline of up to 45 days by which stock-market transactions have to be publicly disclosed is particularly problematic because during that time frame, any information advantage will likely have already fizzled out and gotten priced in on the market. Retail investors would be well advised to view these new “insider strategies” merely as an amusement and to watch them from the sidelines because it generally is unwise to maneuver in the slipstream of other investors with different financial goals, time horizons, and risk parameters. Instead, every investor should pursue a strategy custom-tailored to his or her personal needs and restrictions and should stick with that strategy for the long run.

Regards to Silicon Valley | Democrats are betting on Big Tech

Top 10 stocks in NANC ETF

Sources: Subversive ETFs, Kaiser Partner Privatbank


Regards to Texas | Republicans are betting on Big Oil

Top 10 stocks in KRUZ ETF

Sources: Subversive ETFs, Kaiser Partner Privatbank


Oliver Hackel, CFA Senior Investment Strategist

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