Tag Archives | GURU

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 read more Global X Top Guru Holdings Index ETF (GURU) to its chief competitor, the buy cheap sildenafil citrate 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  trusted tablets pharmacy 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.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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GURU vs ALFA: Comparing the Two Guru ETFs

June has been a rough month for a lot of investors.  The investing themes that have done well so far in 2013—everything from U.S. dividend-focused stocks to Japanese small caps—have gone sharply into reverse.   The market has started to get jitters that the Fed’s QE Infinity will actually be quite finite…and it appears that Abenomics has run out of steam.

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.

During times like these, it’s nice to look over the shoulders of some of the best and brightest managers in the business to see how they are reacting.  I make a habit out of digging through the trading moves of managers I admire, and sites like Guru Focus take what used to be a tedious and time-consuming nightmare—digging through SEC filings—and turn it into a simple screen.

Want to see what Warren Buffett is buying?  It’s as simple as viewing his profile.

Investors looking for a one-stop “buy and forget” guru following strategy now have a couple ETFs to choose from. One—the Global X Top Guru Holdings Index ETF ($GURU)I reviewed about a year ago.

As I noted in my review, GURU’s portfolio is an equally-weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows.  These would include household names like David Einhorn’s Greenlight Capital, John Paulson’s Paulson & Company, and Seth Klarman’s Baupost Capital, among many, many others.

AlphaClone has a competing guru product, the AlphaClone Alternative Alpha ETF ($ALFA).

AlphaClone’s methodology is a little more complex.  The underlying index looks at most of the same managers but has a proprietary system for ranking them.  And while the positions are “equally weighted,” 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.

And AlphaClone’s ETF 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 500 ends a month below its 200-day moving average.

So, which ETF is better?

It’s really a matter of opinion.  ALFA’s built in hedging strategy would have been a life saver during the 2000-2003 bear market or the 2008 meltdown.  But during a long range-bound market, there is the risk of getting perpetually whipsawed by buying and selling at precisely the wrong turning points.  I prefer to hedge my portfolio in other ways—such as by altering the allocation between equities and cash or bonds or by taking an active rebalancing approach.  But is it really just a matter of preference and investing style.

ALFA’s ability to overweight positions based on ownership by multiple gurus is a nice feature, however, and I consider this an advantage over GURU’s simple equal weighting.

GURU_ALFA

Taking a look at YTD performance, however, GURU has the better record.   ALFA has tracked the S&P 500 pretty closely this year, whereas GURU is outperforming by a good 5%.

A single five-month period is not sufficient for judging the performance of a model, and over time I would expect both to outperform the S&P 500, at least before taxes and fees.

But you should also have realistic expectations about what you are buying.  Buying GURU and ALFA is not the same as buying an interest in the underlying hedge funds.  As I noted in my original article on GURU, the ETFs only buy listed stocks, and many major guru investments are not publicly traded.  Many of Warren Buffett’s holdings are privately-held companies, for example.

Furthermore, the ETF only tracks long positions.  If a given “high conviction” pick is really just one half of a pair trade, the ETF managers would have no way of knowing this.  And there is no way to account for futures, options or other derivatives that might be part of the trade.

And finally, as with all guru-following strategies, there is a time lag.  It is entirely possible that the conditions that lead a guru to buy a stock no longer exist by the time that GURU and ALFA place their trades.

My take?  GURU and ALFA are both decent ETF products, and I expect both to do well.  But if you really want to take full advantage of guru-following strategies, roll up your sleeves and look at your favorite investors one by one.  You can learn more from looking at the manager’s portfolio as a whole than by simply selecting the top pick and blindly following it.

Sizemore Capital has no position in GURU or ALFA. This article first appeared on InvestorPlace.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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