The iBillionaire Index: A Soon-To-Be New Guru ETF Option

“We’re not in bear market territory, and we’re not really in a broad-based correction. But investors seem to be struggling to find that next great investment theme.”

I wrote those words this past June, when we were in the midst of the “taper tantrum.”  My, how little things change in five months. Now in mid-November — and with bond yields rising yet again due to Fed tapering fears — investors are looking for that next great investment theme … and mostly coming up short.

U.S. large-cap stocks continue to drift higher, but small- and mid-caps are lagging, and the sectors that showed the most strength in the early fall — such as Europe and emerging markets — are in correction mode. It’s a tough market to make sense of.

During times like these, it can be helpful to look over the shoulders of some of the best and brightest managers in the business to see how they are allocating their capital. I make a habit out of digging through the trading moves of managers I admire.

Investors looking for a one-stop “buy and forget” guru-following strategy now have a couple of exchange-traded funds to choose from.

In June, I compared the Global X Top Guru Holdings Index ETF (GURU) to its chief competitor, the AlphaClone Alternative Alpha ETF (ALFA). Today, I’m going to throw a new index competitor into the mix: the iBillionaire Index. An iBillionaire Index ETF is in the works as well, though the sponsor did not have a specific launch date.

Let’s take a quick peek at each of these guru-following strategies and highlight their differences. At first glance, you might think the strategies are interchangeable and that there is no value in adding another “me too” ETF. But the strategies each have unique features that can make each better than the others under the right set of market conditions.

ALFA was the first guru ETF to come to market, beating GURU by about a month. It also happens to be the most complex of the three. The AlphaClone index ranks hedge fund managers by a proprietary system and equally weights their top holdings. There is an allowance for overweighting if a stock has multiple guru owners. For example, a stock held by twice the number of managers would have twice the weighting in the index.

ALFA has one other noteworthy feature: It has a “dynamic hedging” mechanism that allows it to be up to 50% short during a prolonged market downturn. In ALFA’s case, the ETF will shift half of the portfolio into an inverse S&P 500 fund when the S&P ends a month below its 200-day moving average.

GURU, which is based on the Solactive Top Guru Holdings Index, runs a simpler strategy. GURU’s portfolio is simply an equally weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows. Only managers that run concentrated portfolios are considered, but beyond that, there really is no other criteria.

The iBillionaire Index takes a slightly different approach. To start, it limited its pool of gurus to “financial billionaires,” or money managers who have amassed personal fortunes of over a billion dollars.