ETF follows famous hedgies' lead

Fund mirrors high-conviction bets by Paulson, Einhorn and the like
MAY 26, 2013
By  MFXFeeder
Investor fascination with hedge funds has been on full display for the past two weeks in response to managers' filing their quarterly holding reports, known as 13Fs. Everyone wants to know what David Einhorn, John Paulson and David Tepper are buying and what they are unloading. And yes, there is an exchange-traded fund to feed that fascination. It is up 52% since its inception less than a year ago — 18% more than the S&P 500. The Global X Top Guru Holdings Index ETF (GURU) sounds a bit gimmicky, but its inner workings are more sophisticated than its name. Guru's methodology is to scour 13F filings and buy the biggest stock holding from each hedge fund. Filters are put in place to eliminate funds that have high turnover rates, and the ETF considers only hedge funds with concentrated top holdings. In other words, it screens for stocks to which hedge funds are committed, which makes it a sort of greatest hits of hedge fund stock picks. The outperformance of Guru, which has 80% of its assets in U.S. stocks, over the S&P 500 is partly due to the fact that it is an equal-weighted portfolio. That means that smaller, juggernaut stocks such as GameStop Corp. (GME) and Pandora Media Inc. (P) are given about a 2% weighting, as are giants such as American International Group Inc. (AIG) and Microsoft Corp. (MSFT). By contrast, market-capitalization-weighted ETFs tend to drown out small stocks' gains and get hit harder by overvalued larger stocks coming back down to earth. One successful example of Guru's methodology is Liberty Media (STRZA). Guru picked up the stock in November when it was JAT Capital Management's top holding. During the next quarter, the stock was spun off, and gained 50% in value. The ETF sold it a quarter later for a huge profit when the next round of 13F filings showed that it no longer was JAT Capital's top holding. A big selling point for Guru is convenience. It would take a lot of legwork to download and read through every 13F filing and find cases such as Liberty Media. There are hundreds of 13Fs filed quarterly, and it is no picnic to read through them. Whether Guru is a cheap or expensive ETF depends on your perspective. With an expense ratio of 0.75%, it is much cheaper than a hedge fund, which typically charges a 2% management fee and a 20% performance fee. On the other hand, 0.75% is about double the average cost of a U.S. equity ETF. For a $10,000 investment, that is $75 a year in fees. When you can get the Schwab U.S. Broad Market ETF for an expense ratio of 0.04%, or $4 on a $10,000 investment, $75 seems like highway robbery.

ARRIVING AT A PARTY

At $38.8 million in assets, Guru is one of the smaller ETFs, which scares some investors. That said, it has seen $36 million in inflows in the past six weeks, and the total value traded last month was $1.4 billion, a big jump compared with $27 million in December. With smaller ETFs, it is always reassuring to see investors arriving at the party rather than going home. Is Guru a good investment? Like every ETF, it depends on an investor's purpose and time horizon. It comes down to how comfortable one is taking about more U.S. stock exposure that may overlap with your existing portfolio — and how much you believe in the investing prowess of hedge funds. --Bloomberg News--

Latest News

Wealth Enhancement, Bluespring add new RIA partners
Wealth Enhancement, Bluespring add new RIA partners

The acquisitive firms' latest deals extend their presence with experienced teams in Texas and Wisconsin.

Blackstone buyout fund closes years late, billions short of initial goals
Blackstone buyout fund closes years late, billions short of initial goals

The alternative investment giant expects fundraising to wrap around the end of the month, effectively taking twice as long as peers that closed in the past year.

What Americans actually want in an advisory relationship
What Americans actually want in an advisory relationship

New research unpacks the top traits clients look for in an advisor, why some advice may leave people dissatisfied, and the factors that fuel trust.

Add Commonwealth Financial – a blockbuster – to the list of potential LPL targets
Add Commonwealth Financial – a blockbuster – to the list of potential LPL targets

Chatter about LPL, a behemoth, buying Commonwealth Financial Network, a boutique, has been building all week.

Younger Americans are changing the dynamics of IRAs
Younger Americans are changing the dynamics of IRAs

Millennials, Gen Zs are not following the preferences of older generations.

SPONSORED Retirement plan balances are flourishing. Why are so many advisors missing out on a $3 trillion opportunity?

Participants who receive professional 401(k) advice see higher returns on average, net, than those who don't.

SPONSORED Focus on clients, not compliance – why Gary Corderman found his fit with Farther

This wealth management platform finally delivers on the technology promises other firms couldn't - giving advisors a better way to scale and serve