If you can't beat 'em, join 'em.
That's the philosophy behind the new Direxion iBillionaire Index ETF (IBLN). The exchange-traded fund tracks the stock holdings of some of the richest and most successful investors, such as Warren Buffett, David Einhorn and Carl Icahn.
The index uses the billionaires lists produced by both Bloomberg and Forbes to identify 20 or so U.S.-based billionaire investors. (So no Bill Gates or Walton family members.) It then picks the top 10 billionaires by performance. It judges performance by looking at filings called 13Fs that investors overseeing more than $100 million in U.S. equities must file with the Securities and Exchange Commission. The filings, due within 45 days of the end of a quarter, list equity holdings that trade on U.S. exchanges. The 30 stocks where the investors have the most combined money becomes the ETF's index, which is rebalanced quarterly.
For example, in the 13Fs for 2014's first quarter, Apple Inc. (APPL) was the big money's favorite stock. It made up 16% of Mr. Einhorn's reported holdings, 12% of Mr. Icahn's, 8% of hedge-fund manager David Tepper's and just under 1% of George Soros's. The next most popular stock was Micron Technology Inc. (MU), with a combined exposure of 16.8%, and Priceline Group Inc. (PCLN), at 14%. The 30 stocks are equal-weighted, with each one making up 3.3% of the index.
(See also: Loomis Sayles' Dan Fuss worried about leveraged funds)
If this sounds a lot like the Global X Guru Index ETF (GURU), that's because it is. There are a few differences. IBLN only looks at large-capitalization U.S. stocks while GURU, which has $500 million in assets, will look at small- and mid-cap stocks and some international. This should make IBLN less volatile than GURU, which rose 48% in 2013, outdoing the S&P 500 Index's 32%. So far this year, with the performance of small-caps and momentum stocks cooling, GURU is up 2% to the S&P 500's 8%.
So far this year — in theory, since the index wasn't live — the iBillionaire Index is up 7.7%, compared with GURU's 2.3%. However, in the past two momentum-driven years, GURU has a slight edge, returning 75% to IBLN's 67%. IBLN will charge 0.65% of assets annually, slightly less than GURU's 0.75%.
The other big difference is that GURU looks through dozens of hedge-fund portfolios. IBLN only looks through the portfolios of the richest and most successful investors.
The parent of IBLN, Direxion, is mostly known for its
high-octane leveraged ETFs that provide triple exposure to different markets. IBLN is the latest in a line of more plain vanilla, retail-friendly products that Rated R issuers like Direxion are creating to reach a broader audience.
The philosophy of riding the coattails of great investors is a fun, if not novel, idea. IBLN is essentially a theme ETF, and investors should be aware that 13F filings hardly show a full or timely picture of how billionaire investors make their wealth. A more practical issue: The ETF tracks large-cap U.S. stocks, so investors may find that its holdings overlap with other funds they own.
