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--
