The Deregulation Arbitrage: Why Markets Are Mispricing Policy Friction

The Free Markets ETF (FMKT) operates on the premise that deregulation acts as a catalyst for earnings growth by cutting down on time to market and operational friction. While many investors view deregulation as a political talking point, it functions as a fundamental efficiency play. By removing regulatory bottlenecks, companies can speed up product cycles and improve margins. These dynamics are currently underpriced by a market focused on AI driven passive growth. This approach provides an advantage for investors who look past partisan labels to identify the specific policy shifts that actually move the needle on corporate profitability. For those who view the S&P 500 as an over concentrated AI index, FMKT offers a way to rotate into value tilted sectors where policy driven tailwinds are just beginning to impact the bottom line.

The Hidden Cost of Regulatory Friction

Conventional wisdom treats regulation as a static cost of doing business. However, as Michael Gayed notes, regulation is a stopping point. It is a source of friction that dictates how fast a company can innovate. The systemic insight here is that when you remove these bottlenecks, you do more than save on compliance costs; you change the velocity of the company.

Gayed treats deregulation as a supply side optimization rather than a political stance. By using AI to scan earnings transcripts for mentions of regulatory relief, the fund identifies companies where management has flagged these frictions as a primary constraint on growth.

Regulation is a stopping point, is a friction that hurts earnings and time to market.

-- Michael Gayed

The downstream consequence is a re-rating of value. If the market prices companies based on historical performance under a high friction regime, the removal of that friction creates a delta that investors are currently ignoring. The payoff is delayed, as executive orders take time to filter into actual earnings, but the competitive advantage lies in positioning before that re-rating occurs.

Why the Obvious Fixes Often Fail

A common pitfall in thematic investing is confusing companies that are politically favored with those that are fundamentally benefited. Gayed distinguishes between these by focusing on specific mechanisms, like FedRAMP for government contracts or FAA approvals for aerospace, rather than broad sector themes.

The system responds to these shifts in ways that passive indices miss. While the S&P 500 has become a de facto AI index, FMKT shifts capital toward sectors like financials, energy, and aerospace where deregulation acts as a force multiplier.

The S&P 500 is no longer as diversified as people think it is. It is a thematic fund... Large cap growth is what? It is basically AI.

-- Michael Gayed

This creates a systemic divergence. As the broader market crowds into AI linked growth, the free market sectors remain under rewarded, setting the stage for a rotation once the regulatory impact begins to show in quarterly earnings.

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