If you feel like everything has become increasingly political in the United States in recent years, you probably aren’t alone. Now, even investing is, in some ways, becoming political. Many consumers expect brands to have a stance on polarizing issues, and an increasing number of ETFs have been launched in recent years with the intent of allowing people to invest in companies that they believe are aligned with their political viewpoints (i.e., Republican or Democratic).
Whether this is a good or bad idea, or good or bad for the country, is a topic I will leave for the reader to decide. For now, let’s take a look at two such ETFs, each representing an opposing side of the aisle — the Point Bridge GOP Stock Tracker ETF (BATS:MAGA) and the Democratic Large Cap Core ETF (NASDAQ:DEMZ).
Two Sides of the Same Coin
These ETFs ostensibly exist to enable investors to invest based on their political viewpoints, but what does that mean in practice?
Point Bridge Capital says that it “allows you to invest in companies that align with your Republican political beliefs.” It does this by investing in up to 150 S&P 500 (SPX) companies “whose employees and political action committees (PACs) are highly supportive of Republican candidates.” The holdings are equally weighted so that smaller S&P 500 companies are not crowded out by the largest companies.
What does this look like on the ground? MAGA owns 150 stocks, none of which have more than a 1% weighting, so this is actually a very diversified fund. Its top 10 holdings make up a minuscule 8.4% of assets. Below, you’ll find an overview of MAGA’s top 10 holdings using TipRanks’ holdings tool.
Holdings come from across a wide array of industries. For example, the nominal top holding is pharmaceutical giant Eli Lilly (NYSE:LLY), while homebuilder Pultegroup (NYSE:PHM), cruise line operator Carnival Corporation (NYSE:CCL), car auction company Copart (NASDAQ:CPRT), and alcoholic beverage maker Molson Coors Brewing (NYSE:TAP) round out the rest of the top five. In part, because it is equal-weighted, one interesting thing about MAGA is that it has a low weighting towards technology stocks compared to the S&P 500 and many broad-market ETFs.
Meanwhile, DEMZ, which is an ETF from Reflection Asset Management, invests in S&P 500 companies that have made 75% of their contributions to Democratic causes and candidates. This results in an ETF with 47 holdings, where the top 10 holdings make up 42.2% of the fund. As you can see from the overview below, DEMZ skews more towards the tech sector than MAGA does, with a relatively large 5.4% stake in Apple (NASDAQ:AAPL) and top 10 positions in IBM (NYSE:IBM) and Nvidia (NASDAQ:NVDA).
Also, those who have followed the ongoing battle between Florida’s Republican governor Ron DeSantis and Disney (NYSE:DIS) will probably not be surprised to find that Disney is one of the ETF’s top 10 holdings. Note that DEMZ is not an equal-weighted ETF like MAGA.
How Have These ETFs Performed?
Essentially, both ETFs use the same strategy to screen for companies that donate to political candidates or causes on opposite ends of the aisle. The process is similar, but the end result obviously ends with a different set of holdings. So, what type of results have these strategies provided for investors?
As of the end of May, MAGA had a one-year total return of -8.9% (although, keep in mind that the S&P 500 was in a bear market last year, so this result isn’t as bad as it may sound. Zooming out to a three-year time frame, MAGA has produced solid 16.6% annualized total returns for its holders. However, over a five-year time horizon, these results drop down to a 7.5% annual return.
Meanwhile, DEMZ only launched in 2020, so it doesn’t have an extensive track record, but it had a 10.5% total annualized return since inception as of the end of the most recent quarter.
Mind the Fees
These performances are solid enough (more on this later), but one thing that investors should be aware of is that both of these ETFs have fairly high expense ratios. DEMZ has a 0.45% expense ratio, while MAGA has an ever higher 0.72% expense ratio.
These two ETFs are opposed in terms of their political ideologies, but they employ similar approaches toward stock selection.
Both have put up fair results over the last few years, but this brings up a bigger point. While the ETFs take fairly complex, novel approaches, investors may be better off just investing in a broad-market S&P 500 or Nasdaq (NDX) ETF with lower fees. Remember that both of these ETFs are screening for S&P 500 stocks as a starting point, and MAGA contains nearly one-third of the S&P 500 in its portfolio.
Let’s say that you ignored the political noise and simply invested in the largest S&P 500 ETF, the Vanguard S&P 500 ETF (NYSEARCA:VOO), or the largest Nasdaq ETF, the Invesco QQQ Trust (NASDAQ:QQQ) instead of MAGA or DEMZ. These ETFs have much lower expense ratios of 0.03% and 0.2%, respectively.
VOO’s expense ratio is orders of magnitude cheaper than that of MAGA or DEMZ, while QQQ’s isn’t as low but is still considerably cheaper. In year one, an investor putting $10,000 into one of these ETFs would pay just $3 in fees with VOO or $20 in QQQ versus $45 with DEMZ or $72 with MAGA. Over time, these fees can compound and make a real difference to your overall portfolio as an investor.
Beyond the fees, VOO has a solid performance track record. While it has lagged MAGA on a three-year basis with a 12.8% annualized return, it has outperformed it over a five-year timeframe with an 11% annualized return. Meanwhile, as of the end of the most recent quarter, QQQ had a three-year return of 19.8% and a five-year total annualized return of 15.7%, easily beating the competition.
Note that DEMZ has not been around for long enough to compile a three-year or five-year track record. It’s also important to note that both of these ETFs are minnows in the bigger investing picture — MAGA has $18.7 million in assets under management, while DEMZ has $23.5 million.
If, as an investor, it is truly important to you to invest in companies that donate to candidates from your side of the aisle, then these ETFs could theoretically warrant a place in your portfolio. They could also potentially be interesting as a vehicle for traders who want to use them as a way to bet on the outcomes of elections or certain legislation passing.
But beyond that, it seems like most investors would likely be better off keeping it simple via a broad-market fund like QQQ or VOO instead of making their financial futures political.