Rich Returns From a Poor Man's Hedge Fund
Investor fascination with hedge funds has been on full display for the past two weeks as managers filed their quarterly holding reports, known as 13Fs. Everyone wants to know what John Paulson or David Einhorn or David Tepper is loading up on and what they're getting rid of. And yes, there's an exchange-traded fund to feed that fascination. It's up 52 percent since its inception less than a year ago -- 18 percent more than the S&P 500 Index.
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 -- those that do a lot of rapid-fire buying and selling -- and the ETF considers only hedge funds with concentrated top holdings. In other words, it screens for stocks that hedge funds are committed to, which makes it a sort of greatest hits of hedge fund stock picks.
The outperformance of GURU, which has 80 percent 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 like Pandora (P) and GameStop Corporation (GME) are given roughly a 2 percent weighting just like giants such as Microsoft (MSFT) and AIG (AIG). By contrast, market-cap-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 of 2012 when it was JAT Capital Management's top holding. During the next quarter, the stock was spun off and gained 50 percent in value. The ETF sold it a quarter later for a huge profit when the next round of 13F filings showed that it was no longer 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 like Liberty Media. There are hundreds of 13Fs filed quarterly, and it's 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 percent, it's much cheaper than an actual hedge fund, which typically charges a 2 percent management fee and a 20 percent performance fee. On the other hand, 0.75 percent is about double the average cost of a U.S. equity ETF. For a $10,000 investment, that's $75 a year in fees. When you can get the Schwab U.S. Broad Market ETF for an expense ratio of 0.04 percent, or $4 on a $10,000 investment, $75 seems like highway robbery.
At $38.8 million in assets, GURU is one of the smaller ETFs, which scares some investors. That said, it has seen $36 million of inflow in the past six weeks, and the total value traded this past April 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. At the end of the day, it comes down to how comfortable you are taking on more U.S. stock exposure that may overlap with your existing portfolio -- and how much you believe in the investing prowess of hedge funds.
Eric Balchunas is an exchange-traded fund analyst for Bloomberg. More ETF data can be found here.