Politics Is Creeping Into Investment Portfolios. The Cost Can Be Higher Than You Think
Political investing products promise portfolios that reflect the values of the people buying them. Fresh performance data and new academic research suggest investors can pay for that alignment through higher fees and weaker returns.
The bigger cost may come from the thinking behind the funds. Political identity can shape how investors view the economy and markets, even when the underlying conditions point somewhere else.
Red and blue own the same stocks
Kimberly-Clark sits inside three politically branded exchange-traded funds at once, according to LSEG data. The American Conservative Values ETF screens out companies it sees as hostile to conservative values.
The Democratic Large-Cap Core Fund buys only companies sending more than 75% of political donations to Democratic causes. The Truth Social America First ETF holds 150 S&P 500 names whose employees and political action committees back Republican candidates.
Despite those different screens, the portfolios still overlap. More than two dozen stocks are jointly owned by the conservative-leaning ACVF and liberal-leaning DEMZ.
What the branding costs
Expense ratios range from 0.45% at DEMZ to 0.75% at ACVF, compared with 0.03% for the Vanguard Total Stock Market ETF. That leaves investors paying considerably more for funds designed around political screens.
The three funds also have correlations with the S&P 500 ranging from 93% to 98%. Over both the five- and seven-year periods, the index beat all three funds, while also beating two of the three over the one- and three-year periods.
Partisanship moves real money
Republicans currently rate the economy at 85.0 on the University of Michigan consumer sentiment index, compared with 35.5 among Democrats. Under Joe Biden, the gap ran in the opposite direction by an average of 31.5 points.
Those shifts can carry over into investment decisions. Democratic investors who went to cash after Inauguration Day 2025 missed a 19% annualized total return in the S&P 500, while Republicans who sat out the Biden years missed 14.2% annualized.
A new paper titled "Political Polarization and Stock Market Expectations" argues that identity helps explain the divide. Researchers from USC, the University of Arizona, and Colorado State found that investors can keep their expectations fixed even when underlying conditions change.
"We end up forming our beliefs to meet our identities."
— Richard Sias, University of Arizona
The effect was strongest among people who were more numerate, financially literate, and educated. Those investors were better equipped to build an explanation that supported the position they already held.
How to hold exposure instead
The S&P 500 has risen under every political combination in Washington, averaging more than 11% per year since 1970. The US economy has also grown with both parties controlling the White House and Congress at different points.
Policy outcomes are difficult to trade because campaign promises still have to pass through negotiation, compromise, and revision before becoming law. The eventual economic impact can also look different from what investors expected when the policy was first proposed.
Markets can price those expectations before policies are finalized, adding a timing problem to the uncertainty around the policy itself. An investor has to get both the eventual outcome and the market's reaction to it right.
Spreading capital across asset classes, sectors, and regions reduces the impact of any single political event. Different sectors can lead or lag under any administration, which leaves a diversified portfolio less dependent on one political outcome.
For investors who genuinely want to avoid owning certain companies, a partisan ETF provides a way to apply that screen. The performance record so far shows that doing so can mean paying a higher fee while giving up some of the returns available from the broader market.
