A deregulation-themed ETF, while launched under a Republican administration, can adapt to a Democratic one. The core theme remains, but the sector focus shifts to areas favored by the new party, such as alternative energy, solar, or wind, ensuring the strategy's longevity.
Due to the heavy weighting of a few large tech companies, the S&P 500 no longer represents a diversified view of the economy. It functions more like a thematic fund for large-cap growth, primarily driven by AI, semiconductors, and software, making it a poor benchmark for non-tech strategies.
To identify companies benefiting from a theme like deregulation, modern ETFs employ AI to screen earnings call transcripts. This data-driven approach quantifies how often company executives mention the theme, providing a more objective filter for stock selection than relying on sector analysis alone.
In actively managed thematic funds, the largest holdings are not necessarily the purest plays on the theme. Portfolio managers combine thematic fit with momentum, meaning a company with a moderate thematic link but strong price momentum will be weighted more heavily than a pure-play stock with weak momentum.
The market often fails to price in the full effect of deregulation immediately. Policy changes can take a year or more to translate into improved corporate earnings. This creates a potential opportunity as the market is likely to re-rate these companies only after the financial benefits become visible.