The Pros and Cons of Political ETFs

The Pros and Cons of Political ETFs

Noah Damsky of Marina Wealth Advisors says politics can get investors engaged, but the investments make no sense.

Reviewed by: Staff
Edited by: Ron Day

Noah DamskyNoah Damsky is a managing partner at Marina Wealth Advisors, a Los Angeles-based firm that specializes in investment management and tax planning strategies for neutrals and sole practitioner attorneys.

Jeff Benjamin: What value do you see in politically oriented ETFs?
Noah Damsky: The value comes from getting clients engaged, not the ETF investment strategy. 

If clients reach out and want to talk about investments or current events, I think it's a win. When we chat things through and ultimately stay the course, it reinforces our investment philosophy and confirms they are on the right path. Clients walk away feeling confident, so we're thrilled.

JB: Marketing aside, what do you think of these niche ETFs as investment opportunities?
ND: They're worthless. 

Some of these funds follow how members of Congress invest. I am skeptical that our elected officials know what they're doing, especially when it comes to investing. The last thing I want to do is put my financial future directly in their hands and invest alongside them. 

When you drill down, some of the largest holdings in these funds are in companies like Apple, Amazon and Microsoft. These names don't sound like groundbreaking, new investment ideas, nor do they indicate they're using an informational edge. It sounds like they're simply following the herd and investing in the largest companies in the world. Plus, these trades may not even be their ideas; they may be done in portfolios managed by financial advisors.

There's far too much conspiracy theory and speculation that underpins the rationale for investing in these funds to appeal to serious investors.

JB: Can you think of anything analogous to politically oriented ETFs?

ND: This feels like an alternative to meme stocks. It's another fad that thrives on Reddit boards and social media.

It's a gimmick because they are not actual investment strategies, they simply follow the way a group invests. 

JB: Where do you see this niche or trend heading?

ND: I think this trend of meme-like fads and gimmicks is here to stay, although the flavor of the month will probably change over time. It's evolved from GameStop, to Bored Ape NFTs to political ETFs. They're each a little different, but they're all rooted in some sort of off-the-wall speculation.

I'm crossing my fingers that the next fad is Beanie Babies. If they ever catch on again, my wife has enough stored away to be worth serious cash.

JB: Can you imagine a scenario where you would recommend a political ETF to a client?

ND: Aside from the general absurdity of these funds, I can't see them fitting into our portfolios because the risk profile is a moving target in the absence of a defined strategy. 

Portfolios need to be mindful of risk exposures such as beta, sector allocation, and volatility. For example, today, one of these funds can have a certain amount of exposure to large-cap technology, but tomorrow maybe it's replaced with mid-cap financials. This change in risk exposure would require changing other areas of the portfolio. And why, because Nancy Pelosi or Mitch McConnell decided to change their minds about some stocks? That's absurd.

Without a defined strategy in these ETFs, the exposure to risk factors can be unpredictable, which makes it challenging for them to serve a specific role in a portfolio. 

Portfolio management principles aside, the best reason I can think of to invest alongside our elected officials is that they have access to better information than the rest of us. I wouldn't be surprised if they trade with an informational edge, but who knows. You might have a hunch, but are you willing to put your money behind it? I don't have any conviction in these conspiracy theory strategies so I can't imagine recommending them to a client.

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.