Novel Trio Of Policy ETFs

Policy, not politics, drives stock selection in these three strategies.

EventShares, a 14-month-old brand looking to carve a niche in the ETF space, recently brought to market a unique lineup of equity ETFs built along party lines. The funds—the Republican Policies Fund (GOP), the Democratic Policies Fund (DEMS) and the U.S. Tax Reform Fund (TAXR)—aren’t meant to be political statements of any sort, but rather vehicles that offer investors exposure to stocks directly impacted by policy changes. EventShares’ CIO Ben Phillips gives us the rundown.

ETF.com: You have emphasized that GOP, DEMS and TAXR are based on policy, not politics. When it comes to the portfolio construction, what does that mean, exactly?

Ben Phillips: From a political point of view, we’re agnostic. We’re really looking at the long-term economic impact of major policy decisions, and then working to identify the potential winners and losers of those decisions. It’s really the fundamental founding of our company, and how we begin the portfolio construction process.

ETF.com: Are you anticipating who will be winners and losers ahead of expected policy changes, or are you looking back and seeing who did what after a policy change? How do you pick holdings?

Phillips: We look at both current and forward-looking policies. We are focused on long term. We are looking out five to six years, and trying to see what the policy priorities are for each party and, for TAXR, specifically, what tax reform policy looks like.

We then try to bring that back with a forward view. So we’re not excluding current policy, but we’re trying to be very forward-thinking on which policies will be most impactful on the market.

ETF.com: If a given policy is expected to benefit, say, infrastructure, why shouldn’t an investor simply buy a sector fund with a lot of exposure to infrastructure? Why go this route?

Phillips: We provide a very specific, targeted approach that offers investors broad access to a very specific basket of stocks expected to be impacted by the policy. Constructing the portfolio on your own—and doing the research required to build a good portfolio—takes a lot of time and is cumbersome to implement.

Our real value-add is bringing that research expertise, bringing that portfolio construction expertise, selling it in one very accessible product that you can track throughout the day in a highly liquid market.

ETF.com: I’d think picking stocks based on policy currently would be challenging because things are changing constantly. How difficult is this task, and how often do you anticipate you’ll be changing portfolio holdings?

Phillips: Having our focus be on long term really helps us not change positions too frequently. But because the funds are actively managed, we can react to changes in the political landscape as quickly as we need to.

If a major piece of legislation was voted down, that would likely cause us to react; same with the upcoming midterm elections. But we don’t expect a lot of turnover. These funds will be rebalanced on a quarterly basis.

ETF.com: Should we expect certain traditional sector tilts, like more health care and renewable energy in DEMS, and more, say, industrials and banks in GOP?

Phillips: Initially, yes. That’s how the portfolios are weighted today. Industrials is the largest sector in GOP, and health care is the largest sector in DEMS. That all starts from what we call subthemes. [Themes in the GOP fund include] border protection, deregulation, infrastructure, U.S. energy independence, and then tax reform as a component of the GOP fund as well.

In the Democrats fund, health care expansion is one of the key subthemes environmentally conscious, which includes green energy, and social good is a large bucket; and finance reform and educational access are other smaller subthemes in the DEMS fund.

ETF.com: Do you think people will look past their personal political views to buy one of these funds? Do you think a Democrat will ever own GOP and vice versa?

Phillips: Could a Democrat own the GOP fund? And would a Republican own DEMS? These products give people a variety of different opportunities to gain exposures, and we’ve seen with the past election that policies can really have an impact on markets.

People should be thoughtful about how they position their portfolios. At the end of the day, it’s about providing exposure to policy decisions that play out over years. It’s not about politics.

ETF.com: Tell me about TAXR. Is it more of a tactical play on expected tax reform?

Phillips: It’s very similar to GOP and DEMS in that it’s forward-looking, first and foremost. We’re trying to identify companies we expect to be most impacted by the proposed tax reform legislation.

But there are also three subthemes here. Explicit tax cut is the largest, and companies set to benefit from it represent roughly half the portfolio; U.S. exporters is about a quarter of the portfolio. The CAPEX deduction, with an eye on interest deductibility, could be a large windfall for a number of companies, so that’s another subtheme.

ETF.com: Where do these funds belong in an asset allocation?

Phillips: They could be both core and tactical. We’re using the term tactical-plus. The GOP and DEMS are all-cap U.S. stock portfolios, so they could be a core position.

TAXR is more tilted towards smaller- and midcap, so it could be used as a core position to replicate a small- and mid-cap allocation, with a specific embedded policy catalyst being tax reform.

Contact Cinthia Murphy at [email protected]