The Political Portfolio: Assessing the Risks and Returns of Ideologically Aligned ETFs in a Divided Market

In an era where political polarization often defines public discourse, investors are increasingly seeking ways to align their portfolios with their values. Politically aligned ETFs—products designed to mirror the stock holdings of members of Congress or companies with partisan donation histories—have surged in popularity. Yet, as these funds grow, so do questions about their efficacy as investment vehicles. This article examines the risks, returns, and strategic role of politically aligned ETFs in a diversified portfolio, while evaluating whether they truly offer a unique value proposition or merely capitalize on ideological fervor.

The Rise of Ideological Investing

The past two years have seen a dramatic shift in how investors approach ESG (Environmental, Social, and Governance) and politically themed strategies. Funds like the Unusual Whales Subversive Republican Trading ETF (GOP), the American Conservative Values ETF (ACVF), the Unusual Whales Subversive Democratic Trading ETF (NANC), and the Democratic Large Cap Core ETF (DEMZ) have attracted attention by leveraging partisan narratives. These ETFs claim to offer exposure to companies or stocks that align with specific political ideologies, often by tracking the investment behavior of lawmakers or firms with documented political contribution histories.

However, a closer look at their performance reveals a critical insight: these ETFs closely mirror the S&P 500. Correlation coefficients between the monthly returns of politically aligned ETFs and the S&P 500 range from 92% to 99%, indicating that their "political alignment" does not significantly alter market exposure. Over the past 12 months, three of the four ETFs slightly lagged the S&P 500, while one slightly outperformed—a deviation likely attributable to higher expense ratios rather than strategic differentiation.

The Cost of Ideology: High Fees and Low Differentiation

One of the most striking features of politically aligned ETFs is their expense ratios. Traditional broad-market index ETFs, such as the Vanguard S&P 500 ETF (VOO) or the Schwab S&P 500 ETF (SCHX), charge as little as 0.03% of assets under management. In contrast, politically aligned ETFs like DEMZ and GOP have expense ratios that erode returns over time. For instance, the GOP ETF, with assets under management in the low millions, generates annual revenues of just over $17,000—a figure that underscores the inefficiency of these funds.

Research by Itzhak Ben-David of Ohio State University, published in the Review of Financial Studies (March 2023), argues that these ETFs are essentially "expensive index funds" designed to exploit polarized investor sentiment. The study notes that the portfolios of politically aligned ETFs are structurally indistinguishable from traditional index funds, with the primary distinction being their marketing. This raises a critical question: Are investors paying a premium for ideological alignment, or are they simply subsidizing a niche branding strategy?

Risk and Diversification: A Double-Edged Sword

While politically aligned ETFs may offer thematic appeal, their role in a diversified portfolio is questionable. Because these funds closely track the S&P 500, they do not provide the diversification benefits typically sought in a well-constructed portfolio. For example, a portfolio containing both a GOP ETF and a traditional S&P 500 ETF would not reduce risk, as their returns are nearly identical. This lack of diversification is further compounded by the higher fees associated with politically aligned ETFs, which amplify the drag on long-term returns.

Moreover, the volatility of these ETFs mirrors that of the broader market. During periods of economic uncertainty or political gridlock, investors in these funds may experience the same—or worse—volatility as those in traditional ETFs, without the added benefit of active management or sector-specific exposure.

Strategic Considerations for Investors

For investors seeking to align their portfolios with political ideologies, the data suggests a more cost-effective approach: allocate to low-cost index ETFs and separately support political causes through charitable donations. This strategy allows investors to achieve both financial and ideological objectives without sacrificing returns to high expense ratios. For example, an investor could purchase a Schwab S&P 500 ETF (SCHX) and redirect the cost savings—estimated at hundreds of dollars annually—to a preferred political action committee or advocacy group.

Additionally, investors should consider the broader context of the ETF market. From 2023 to 2025, global ETF inflows have reached record levels, with active ETFs gaining traction as alternatives to passive strategies. While politically aligned ETFs have not kept pace with this innovation, actively managed ETFs offer opportunities for alpha generation and specialized exposure without the ideological constraints of partisan funds.

Conclusion: Ideology vs. Efficiency

Politically aligned ETFs reflect a growing trend in which investors seek to merge personal values with financial decisions. However, the evidence suggests that these funds are more about marketing than meaningful investment strategy. Their high correlation with the S&P 500, coupled with elevated expense ratios, positions them as inefficient substitutes for traditional index ETFs. For investors committed to ideological alignment, the solution lies not in overpaying for partisan branding but in leveraging low-cost financial instruments and separate charitable contributions. In a polarized market, the most prudent portfolios are those that balance conviction with cost-consciousness.