Investing Like a Billionaire With the iBillionaire ETF

Investing like a billionaire is about to get a whole lot easier.  On August 1, the  Direxion iBillionaire Index ETF (IBLN) will begin trading.

The ETF — based on iBillionaire’s proprietary index — will run a portfolio of 30 of the large-cap S&P 500 stocks most favored by billionaire investors based on their most recent 13F filings with the SEC.

Since its inception in October of last year, the iBillionaire Index has enjoyed returns of 16% compared to 11.8% for the S&P 500. According to iBillionaire, a back-tested version of their index would have roughly doubled the returns of the S&P 500 over the past 8 years. And I should emphasize again that all 30 index constituents are members of the S&P 500. Think of the iBillionaire ETF as a an S&P 500 ETF that excludes the 470 companies least favored by hedge fund gurus.

While I don’t believe in mindlessly copying the trading moves of large, successful investors, I still consider guru-following strategies to be a fantastic source of trading ideas. While many hedge fund managers — and most mutual fund managers — underperform their respective benchmarks over time, their highest-conviction picks actually tend to outperform.

Thomas Howard noted this in his book — Behavioral Portfolio Management — which I reviewed earlier this year. Howard draws the conclusion that most managers are surprisingly good stock pickers; they just happen to be terrible portfolio managers that destroy their own performance by watering down their portfolios will “filler” stocks. iBillionaire’s strategy bucks this trend by running a relatively concentrated portfolio of just 30 stocks.

I wrote about iBillionaire in February, comparing its methodology to two worthy competitors, the Global X Top Guru Holdings Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA).

As I noted then, the “best” guru-following ETF is really a matter of your allocation goals. If you are looking for a large-cap, U.S.-focused substitute for the S&P 500, then IBLN is the clear choice, as its holdings are all S&P 500 holdings and it is long-only.

GURU also tends to have a large-cap bias (though smaller than IBLN), but it also holds its share of foreign stocks — including China’s Baidu (BIDU) and Argentina’s YPF (YPF) — and smaller up-and-comers like internet radio pioneer Pandora Media (P). Hypothetically, GURU could morph into a small-cap international value fund if those were the stocks that the investors it tracks were buying most heavily.

Not that there is anything wrong with that, of course. I’m actually a big fan of small-cap international value stocks. The point I’m making is simply that GURU does not benchmark particularly well to the S&P 500.

And finally, there is ALFA. Of the three strategies, ALFA currently has the smallest-cap bias; Morningstar classifies ALFA as a mid-cap growth fund. ALFA also has one unique characteristic that makes it very different from both GURU and IBLN — it has the ability to hedge by going short. 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.

This hedging will come in handy next time we have a major bear market. But in a raging bull market it is, of course, a moot point.

Ultimately, the ETF that will work best for you will depend on your goals. As always, do your research, and your investments will reward you.