'DEMS' & 'GOP' ETFs Close

EventShares, the firm that rolled out three actively managed ETFs focused on government policy in the last quarter of 2017, is combining the concepts of all three funds into one “best ideas” product. It will shut down the funds that target companies that will benefit from Republican and Democratic policies, while converting the fund focused on tax reform into a broad policy-focused product.

The firm’s overarching thesis is all about focusing on companies likely to benefit from changes in government policy as well as those likely to be harmed by such changes. It launched three funds last October, but only one, the U.S. Tax Reform Fund (TAXR) has gathered significant assets, pulling in more than $10 million. The Republican Policies Fund (GOP) and the Democratic Policies Fund (DEMS) each have about $1 million or less in assets.

“EventShares is built on the thesis that policy is a leading indicator for changes to companies and industries. We want that to be what we lead with,” said EventShares Chief Investment Officer Ben Phillips.

New Perspective            

As of today, TAXR will change its name and ticker to the EventShares U.S. Policy Alpha ETF (PLCY) and adopt a much broader investment objective. Instead of just focusing on changes to tax-related policy, the revamped fund will seek to target companies benefiting from changes to budgets and government agency regulations, as well as from the adoption of new legislative bills, executive actions or budgets, according to the prospectus supplement.

“We realized there are really good investment ideas in each of these [original] portfolios, and thought it made sense to combine them all into one fund and make that our flagship policy fund,” Phillips said.

Like the other EventShares funds, PLCY lists on Cboe Global Markets, parent company of ETF.com.

The fund will consider companies affected by the budget priorities, appropriations and spending of the U.S. government in such areas as defense, border security and health care, among other areas. It will also look at the impact of tariffs and trade agreements, import and export taxes, regulations on different sectors and industries, and changes to the tax codes, the document says.

Methodology

The prospectus also notes the fund will typically hold 50-100 positions, with updates to the portfolio generally made on a quarterly basis. Securities must have at least $250 million or more to be eligible for inclusion in the fund.

Companies are selected using fundamental research gathered from a wide range of sources to target companies likely to see strong earnings growth and price appreciation, those likely to see their business models disrupted and price depreciation. It can hold both long and short positions in affected securities.

The document additionally points out that, beyond equities, the fund can invest in fixed-income securities and commodities.

PLCY essentially combines the objectives of TAXR, GOP and DEMS, and indeed, EventShares’ CEO says that anyone looking at PLCY’s portfolio will recognize many of the names as being from one of the three original funds. He also notes that more than half of the names in PLCY are holdovers from TAXR.

Phillips also notes the firm consulted with investors in TAXR before making the change, even though there is no way of knowing who all the investors in an ETF are usually.

“We certainly reached out to as many investors as we were aware of that owned it and communicated the change. I would say the feedback was unanimously positive,” he said.

Out With The Old
GOP and DEMS are slated to see their last day of trading on April 24, with proceeds from the liquidation of the funds distributed on or after April 27.

The two funds struggled from the outset, as investors seemed not to understand they were nonpartisan products. While GOP sought to identify companies benefiting from Republican-backed policies, DEMS sought to do the same regarding policies backed by the Democratic party. They were never intended to indicate support or preference for either party, but instead to reflect the firm’s analysis regarding both major parties’ platforms and the likely beneficiaries.

“GOP and DEMS were never intended as vehicles to express a political point of view, though they were viewed by some investors and advisors in that light. They were designed to provide exposure to the policies of the two major parties, regardless of an investor’s political affiliation,” said Phillips, who went on to note that the revised product offers access to the firm’s “best ideas … without suggesting a political commitment.”

“We went out with a wide product offering at launch. We talked to a couple thousand advisors and retail investors over the past six months and the feedback was pretty consistent, Phillips noted. “It was that GOP and DEMS feel like political bets no matter how much we stressed the [policy] angle.”

The launch of the distinctly partisan Point Bridge GOP Stock Tracker ETF (MAGA) to great fanfare just weeks before the debut of the EventShares products may have helped to muddy the firm’s message. MAGA, after all, invests in the companies from the S&P 500 whose employees and political action committees make the most donations to the Republican Party—not to mention its very memorable ticker.

“We thought there was a market for each one of the funds, and the market told us that we were wrong, frankly, and that people want a buy-and-hold policy fund,” Phillips said. “The tax reform fund was the closest we were offering to that.”

He attributes the failure of GOP and DEMS at least partially to the “political taint” of the funds’ names and tickers. However, deliberately partisan MAGA has pulled in $39 million in assets.

Contact Heather Bell at [email protected]