author: Christian H. Cooper is the portfolio manager at Subversive Capital Advisors, and a former term member at the Council on Foreign Relations. During the cool fall days of 1906, just west of Plymouth, England, farmers and butchers meandered around a county fair where they found an ox with an unfortunate, but quite certain, future. For the price of a half shilling, those Devon County fairgoers could guess the dressed weight, after slaughter, with the closest guess taking home pieces of our lonesome ox. When the statistician Francis Galton later examined these results, he noticed that the distribution of the correct choice of weight was not random, and the variance was smaller. The median guess was closest to the ox’s actual weight. Statistician Francis Galton collected fairgoers’ guesses of the weight of an ox. He determined that the median guess was closest to the actual weight. GALTON, F. Vox Populi . Nature 75, 450-451 (1907). Galton’s lesson in the wisdom of the crowd is helpful for much more than just guessing the weight of oxen. We launched two ETFs earlier this year that track the portfolios of congressional Democrats and Republicans. Turns out, the wisdom of the crowd makes a difference here, too, because a “smaller variance” in an ox judging contest is mathematically identical to “less risk” in portfolio management. So far this year, NANC, the ETF that makes the same trades as Democrats, is beating the market on both an absolute return basis and risk-adjusted basis. It has also outperformed KRUZ, the analogous ETF for Republicans. NANC (pronounced “Nancy”) has around 750 holdings, and KRUZ has around 500, many of them held at a fraction of a percent. We’re often asked why so many. What I feel people really want to ask is why don’t we simply hold the “best” traders in Congress or try to pick off member’s options trades? First and foremost, we launched these ETFs to highlight what members of Congress are trading. We fully support banning members of Congress from active trading, as does Unusual Whales, our data provider. The key choice made in the portfolio design of the congressional ETFs was to build the holdings around the relative dollars disclosed by each member and their families. In other words, more dollars equals more “votes.” When a member discloses a trade, we explicitly choose the midpoint of that disclosure range, like our fairgoers, no matter what the member actually bought or sold. This choice is what drives all the relative allocations in both NANC and KRUZ. Not only were the farmers of Devon County more accurate than random chance would suggest in 1906, but in 2023, when constructing a congressional trading portfolio in almost exactly the same way, NANC is beating the market on both an absolute basis and a risk-adjusted (Sharpe ratio) basis. The hand-drawn distribution of observations from the day of the 1906 exhibition. The dotted line is the superior prediction when compared to expectations from a normal distribution. It is also how the allocations in the NANC and KRUZ ETFs are determined. GALTON, F. Vox Populi . Nature 75, 450-451 (1907). The wisdom of the crowd is once again delivering superior returns with less risk, and when you divide the pocketbooks of Congress by party, a definite look starts to emerge. NANC has a bubbly, cloud-ish, tech-focus but also-owns-Shell-just-for-the-dividends kind of vibe. KRUZ is a bit darker. KRUZ has seen some things. KRUZ is not here for your AI mumbo jumbo. It is energy, health care, and core American value investing. KRUZ is “print free cash flow to equity” time, dirty jobs, with a focus on making things. These holdings are all expertly managed, fantastic businesses that generate enormous cash flows. But it is telling that the divisions we see in politics are also present in the portfolio holdings between the left and the right. The top 10 holdings of one ETF are Microsoft, Amazon, Apple, Salesforce, Alphabet, Nvidia, Disney, Crowdstrike, Tesla, and API Group. The other has ConocoPhillips, Shell, Accenture, NGL Energy, Philip Morris International, Fedex, Comfort Systems, Intel, United Therapeutics, and PayPal. Pick the coastal liberal from the midwest conservative by portfolio alone; I’ll bet you won’t be wrong. KRUZ was tracking with the S&P 500 until the Ides of March stormed through during the Silicon Valley Bank mini-panic. KRUZ has underperformed the market on both a risk basis and a return basis since then. I think I know why, but that’s a subject for another day. The most important question for now is why the Democratic portfolio outperformed. It isn’t that Democrats are necessarily better traders. Something more important is happening. We are living through the early stages of what it is going to take to rebuild the world in NATO and non-NATO aligned customers, supply chains, and vendors. The U.S. restrictions on chips were really the early tremors of a decade-long decoupling. That takes time to evolve and will fundamentally shift the term structure of interest rates. This instability is going to create cycles when a hopeful, optimistic outlook might outperform, and there are times when a value-based, everything-is-going-to-hell focus might outperform. There is a live natural experiment underway, where you can own the macro focus of your choice plus the qualitative information advantage of Congress. The congressional ETFs are not about politics but rather the magic of relative holdings, and the tapestry of correlation that comes with them, that combine in a macro view, all powered by the crowd. The new fundamental asset management question isn’t “Which index should you own?” but “What state of the world are we in?” Are we in a NANC state of the world or a KRUZ state of the world? The Vox Populi price of either is live every day on your favorite trading app. At the end of the day, it is not the lone trader, dipping out of congressional committee meetings to place trades that creates value. Rather, it’s the collective intelligence of the best-informed and most sought-after crowd on the planet; holding the right names in the right ratios during the right part of the right cycle. NANC has performed as designed, but if this world is changing the way I think it might, we could be in a KRUZ state of the world for a while. P.S. I’m happy to report that no oxen were harmed during the construction of these portfolios. I would also like to thank the 787 butchers and farmers of the 1906 “West of England Fat Stock and Poultry Exhibition” for their contribution to financial engineering.
In my abundant free time I like to hunt for the most kinky, arcane and esoteric securities that are available to a retail investor in the USA. NANC and KRUZ might just be in the top ten LOL
It's not the wisdom of crowds, it's the benefit of inside information. You didn't think Pelosi and Schumer became exorbitantly rich on 150K a year did you?
Trading on stale information seems dumb. Those disclosures are not made on a minute by minute basis. What good does it do to know that a potential insider trader held a stock three weeks ago? The news they were acting on has probably already been released and baked into the price.