With all of the political attack ads we all have to endure for another month, it might be refreshing to see some bipartisanship.

Subversive Capital, the force behind two funds that track the investments of Congressional Democrats and Republicans, is prepping another that will focus on the companies and sectors that overlap between the two camps. That product, the Subversive Bi-Partisan Congressional Trading ETF (PLCY), could launch as soon as mid-December — so anyone interested in the pachyderm-equine hybrid will have to wait until after the election. It’s among the latest in the niche category of politically themed exchange-traded funds, which ranges from tracking how legislators invest to allocating to companies that could benefit from political alliances. And then there’s the elephant in the room: the Truth Social funds, a line of MAGA-inspired investment strategies from a company owned by the president.

“All of these ETFs capitalize on people’s passion for their political affiliation and political views,” said Cinthia Murphy, director of research at TMX VettaFi. “They tap directly into high conviction, like the thematic space does. And just like the thematic space, they offer completely different approaches within the category.”

Cast Your Ballots

If there’s anything the modern ETF market does well as a whole, it’s getting in on investment themes quickly, if not the wider zeitgeist. Partisanship has been building for years in the country, so it seems inevitable that investors would have ETFs to choose from that reflect their identities. That seems to be a draw for the funds affiliated with the president, but the Subversive Congressional Democrats Trading (NANC) and Republicans Trading (GOP) ETFs are more about investing like insiders. It’s not necessarily a popularity contest, but NANC (a nod to Rep. Nancy Pelosi, D-California) currently has more than three times the assets as GOP, at $300 million versus $95 million. “The way Nancy Pelosi trades is high-conviction,” said Dan Weiskopf, a portfolio manager for the Subversive funds. “For that reason alone, people can put their arms around that ETF and the [investment] process.”

Historically, Congressional Democrats have favored technology stocks and Republicans have tilted more toward value than growth, Weiskopf said. That is changing somewhat amid the AI explosion and as more in the GOP have embraced crypto, he noted. So far this year, the GOP ETF is outperforming NANC, with year-to-date returns of 24% versus 18%, respectively.

There are also some new varieties of funds on the horizon:

• The Quantify Quiver Political Capital ETF, which the company filed for this week, would invest in stocks based on engagement with the federal government, assigning companies political influence scores.
• Several issuers are also prepping funds that would make prediction-markets-style binary bets on election outcomes. Currently, the Securities and Exchange Commission is evaluating how to treat novel ETFs, and no such funds have gone live.

Political Brinksmanship: Given the range of strategies — and their extreme variance in risk level — it would be prudent for investors to vet a political ETF as much as (they should) a political candidate. Regardless, some of the funds, as well as others to come, are finding an audience. “Politics sells. The heat, the hatred, the passion makes for great storytelling,” Murphy said. “You get people emotionally invested.”

They say home is where the heart is, but these days, it’s definitely not where the yield is.

ETFs that hold US mortgage-backed securities recorded a net $2.4 billion outflow in September, the most since 2020, according to Bloomberg data. While investors were bullish on the sector at the beginning of the year, the S&P US Mortgage-Backed Securities Index is now down over 3% year to date. With rising interest rates, homeowners are less likely to refinance their loans, and thus investors in mortgage securities are exposed to lower yields than those available in the rest of the market.

“Speaking broadly, investors are demanding higher terms for long-duration debt, but I don’t think you can understate the importance of the change in the shape of the yield curve playing a big role here as well,” said Joe Bullard, active fixed-income strategies analyst at Morningstar, comparing the Fed funds rate with longer-term rates. “Agency mortgage spreads are also widening, so that causes further losses for agency mortgage-backed securities. That’s kind of a double whammy.”

Moving to the Cheap Seats

While most funds in this category experienced outflows in September, a few low-cost funds saw money come in. “Some of the outflows from the rest of the category into these ETFs could be the result of tax-loss harvesting from investors exiting declining positions and agency mortgages in more expensive funds that they’ve held, locking in those capital losses and rotating into lower-fee offerings,” Bullard said.

• BlackRock’s iShares MBS ETF (MBB), the largest fund in this category, notched about $2.7 billion in September net outflows and is down about 3.2% this year, according to ETF.com data. About $1.2 billion of these outflows were due to changes to the company’s model portfolios, per Bloomberg.
• The Vanguard Mortgage-Backed Securities ETF (VMBS), the category’s second-largest fund, recorded about $200 million in inflows. The iShares Mortgage-Backed Securities Active ETF (MBBA) also saw about $562 million in net inflows in September, both potentially due to their low fees relative to the rest of the category.
• The Simplify MBS ETF (MTBA) and the Schwab Mortgage-Backed Securities ETF (SMBS) both had their largest recorded monthly outflows in September, according to Bloomberg, losing about $342 million and $246 million, respectively.

Short and Sweet: While investors were slightly more bullish on mortgage-backed securities in the beginning of the year and into spring, inflation expectations now have investors moving into shorter-term bonds that are less subject to rate volatility, Bullard said. For example, the iShares 0-3 Month Treasury Bond ETF (SGOV) recorded nearly $6 billion in September inflows. “Longer-term rates are more impacted by inflation expectations, and with oil prices rising so dramatically in a short period of time … that has definitely had a big impact on inflation levels across the broader economy,” Bullard said. “Many are anticipating further rate hikes from the Fed moving forward.”