Originally called the DEMZ Political Contributions ETF (DEMZ) when it launched on election day of 2020, Reflection Asset Management’s flagship ETF has been renamed the Democratic Large-Cap Core ETF (DEMZ), a name the firm thought more accurately portrayed the fund’s objectives. Here, Reflection CEO Jason Britton explains why the change is good for investors and how it relates to the strategy underlying the fund.
ETF.com: How did DEMZ come to be?
Britton: Money plays a very large role in American politics, and the margin of victory in the last few elections has been very small. Specifically, the 2020 election was a standout, with the races in Georgia completely deciding not only who the president was going to be, but also giving the Democrats control of both houses of the legislature. The margin of victory in Georgia for President Biden was around 12,000 votes.
The fact that America is awarding the most powerful role on earth (not to mention the head of a $16 trillion economy with a nuclear arsenal) based on 12,000 out of 150 million votes cast (.008%) is astonishing.
We wanted to say, “enough.” We spend so much time and energy thinking about what we're going to buy—fair trade, free-trade, organic, etc., and all of us are trying to lead a more natural, healthy, environmentally friendly life. But most of us really don't think at all about what we own in terms of our investments. In many situations, we probably own the company, but wouldn't go near the product, which strikes me as odd.
ETF.com: Why change the name from the DEMZ Political Contributions ETF to the Democratic Large-Cap Core ETF?
Britton: Largely because the “Democratic Political Contributions Index” didn't mean anything to anybody. They didn't know what to do with it. They didn't know what it replaced. They didn't know what was in it. They just knew it was Democratic and it had something to do with political contributions. It just wasn't a descriptive name.
The name change really was an effort to more clearly articulate what is in our fund—a core large cap holding for Democrats. DEMZ Large Cap Core Fund is designed to track the DEMZ Large Cap Core Index, which is designed to track the S&P 500 Index,1 and it looks and feels like that index.
ETF.com: How did you develop the index?
Britton: I was approached by a firm called Goods Unite Us, which has a wonderful phone app. You download it on Android or iPhone, and it allows you to search by brand, by company or by politician, and basically see where the political money comes from and is going. Goods Unite Us compiles its data from the Federal Election Commission. They also write a lot of thoughtful pieces. It's not so much "gotcha" as it is "shine a light on" money in politics. And it's completely nonpartisan.
For construction of the DEMZ Large Cap Core Index, which the fund is designed to track, we buy data from them under a licensing agreement for all the publicly traded companies that are in the S&P 500 that give 75% or more of their political contributions—which is defined as not just corporate giving, but corporate giving and senior executive giving—to Democratic candidates and organizations. So it's pretty straightforward, and is based on real data.
Some companies are very careful about spreading money around both political parties because it is in their interest, and that is perfectly legal in our system. Ideally, money should have no place in politics, but that's not where we are. Companies that split their giving, however, do not meet the index’s criteria.
Still, we don't just then buy every company that makes it through the screen. Shockingly enough, the S&P 500 reflects American politics. It's give or take 50/50, roughly—not in terms of dollars given or in terms of market cap, but in terms of constituencies. So, of the 500 companies—technically 506—about 240 of them meet the threshold of 75% or more to Democrats.
We take that list of 240 names from Goods Unites Us and use a process called factor optimization to construct the DEMZ Large Cap Core Index.
ETF.com: How does the factor optimization work?
Britton: Factor optimization is a computer modeling process that lets us try to combine different inputs to get an output that most closely resembles a desired outcome. It’s like assembling a puzzle: You know what the end picture is supposed to look like, so you try different combinations of pieces until you get what you’re looking for.
ETF.com: When the fund launched, Trump was still president. In the wake of the election, the attack on the Capitol and the start of Biden's presidency, has the investment thesis changed?
Britton: The investment thesis hasn't changed at all, and it’s as straightforward as it always was. With companies that are donating primarily to the Democratic Party, you would infer they are likely managed according to progressive values. And those progressive values tend to be living wages, care for the environment, thoughtfulness around data privacy and consumer protection, etc.
There's a lot of what we believe you would describe as values-based or ESG2 investing correlations with the progressive agenda: treat women fairly, pay women fairly, treat minorities fairly, pay minorities fairly. These institutions and corporations that have internalized this are essentially managing their companies according to progressive values. We think looking at political contributions is a very meaningful way of determining how a company may behave. I believe our process is more straightforward and reflective of determining a company’s value than traditional accounting metrics.
GAAP—generally accepted accounting principles—accounting, we believe, fail us in ascribing value, because they don’t allow for the appropriate allocation or information to be expressed around human capital.
That was fine when GAAP was created, in the 1930s. Back then, it was fine to think in terms of book value, normalized earnings, tangible book value, etc., because we made stuff. We were a low-skilled manual-labor-driven economy. We made razor blades and Coca-Cola and ice cream and cars. We're not that kind of economy anymore. We're a medical-, information- and services-based economy, where we believe company valuations should be based on intangibles and intellectual property instead of GAAP.
We're a $16 trillion economy, the bulk of which may not be accurately described by our principal fundamentals of accounting. When you think about it, that’s alarming.
What's the most important thing about Nike? Is it the fact that it makes shoes and has this inventory of rubber? Or is it that it has the brand that it has, and the relationship it has with the athlete and the ability and the reach? Of course, we think it's the latter. But you don't get to carry Nike's brand on their balance sheet. There's no prescribed way of figuring out what that looks like.
Note: The ETFs in the graph include the Democratic Large Cap Core ETF (DEMZ), the American Conservative Values ETF (ACVF) and the SPDR S&P 500 ETF (SPY).
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. The market price returns are based on the official closing price of an ETF share or, if the official closing price isn't available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share, and do not represent the returns you would receive if you traded shares at other times. NAVs are calculated using prices as of (4:00 PM Eastern Time).
ETF.com: Is there an alternative to GAAP accounting?
Britton: The best approach I have seen in my 20-year career is looking at how companies engage human capital. How do they engage with their workforce? Are they treating them like an asset that's to be supported, to be trained, promoted and retained? Or do they treat them like a low-cost-supplier widget where, the second things go wrong, they start to fire or slash and burn. Do they pay living wages or minimum wages and then look for the federal government to subsidize their workers’ lives? There are some companies that do what we believe is right, and those are the ones we expect to see in the index.
At base, our belief is that if a company and its senior executives are donating overwhelmingly to the Democratic Party, they’re likely thinking about managing their company toward those progressive principles that we think makes them good stewards of capital, and the kind of companies we want to own.
Then, we put them together to construct the DEMZ Large Cap Core Index, which the fund is designed to track, in a factor-optimized way that gives us the opportunity to own a much smaller universe— roughly 45 securities in both the index and the fund. In that way, we're not forced to sacrifice expected performance, take on additional risk or forgo diversification.*
*Diversification does not ensure a profit or guarantee against a loss.
1 The S&P 500 is a U.S. equity index that is market capitalization weighted and is calculated and published by S&P Dow Jones.
2 Funds may underperform other similar funds that do not consider conscious company/ESG guidelines when making investment decisions.