ETF Showdown: Guggenheim Insider Sentiment vs. Direxion All Cap Insider Sentiment (NFO, KNOW)

Eric Dutram: With today’s uncertain market, stocks aren’t trading on fundamentals as much as they are on rumors, conjecture, and fear. Thanks to this, a number of securities have deviated from what is likely to be their fair value, suggesting that some decent opportunities could be starting to appear for intrepid investors who have a long time horizon and a high tolerance for volatility.

While this may be true, it is still quite hard to separate the cream of the crop from everything else in this rocky market. Although a fundamental approach based on PE ratios and debt levels could be one way to go, some might be better served by following company insiders into the best stocks (see the Guide to the 25 Cheapest ETFs).

When a company insider—such as a CEO, director, or someone who owns more than 10% of a company—buys or sells stock in their firm, they must report it to the SEC. As a result of this rule, investors have a reliable track record of which company executives are buying up shares of their own company’s stock and which are staying on the sidelines.

This could potentially be a useful tool as these insiders are probably the individuals who know the most about a particular firm since they are so engaged in its day-to-day operations. After all, if you live and breathe a particular company, you are more in tune with its strengths and weaknesses than everyday investors (see Five Cheaper ETFs You Probably Overlooked).

As a result, it could be a good idea to follow these insiders and buy up securities when they purchase more stock in the company. After all, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise” said Peter Lynch, the legendary former Manager of the Magellan Fund.

While investors can certainly comb through SEC Form 4s and track insider purchases and sales on their own, an easier approach could be to take a closer look at some of the insider ETFs on the market. These ETFs look for a group of companies which have favorable metrics in terms of insider activity and invest in a portfolio of these stocks (see The Complete Guide to Preferred Stock ETF Investing).

Currently, there are two ETFs that utilize this approach on the market today. While both may appear similar, there are actually some key differences which investors should be aware of which we have highlighted below:

Guggenheim Insider Sentiment ETF (NYSEARCA:NFO)

This product tracks the Sabrient Insider Sentiment Index which is a benchmark of 100 stocks that reflect favorable corporate insider buying trends and positive earnings estimate increases. The product charges investors 65 basis points a year in fees and has about $74 million in AUM.

Current top holdings come from a variety of industries while no single company makes up more than 1.1% of assets. At time of writing, Frontier Communications (NASDAQ:FTR), Questcor Pharma (NASDAQ:QCOR), and Cedar Fair (NYSE:FUN) take the top three spots.

In terms of sectors, the skew is towards consumer cyclical stocks, followed by financials. Beyond that, energy, industrials, and technology each account for 11% of assets as well (see Three Great Tech ETFs That Avoid Apple).

Investors should also note that the product has a tilt towards smaller securities as micro and small caps make up more than half of the portfolio. With a 17% holding in midcaps, the product thus has just 27% for large cap securities, implying a heavy tilt towards the smaller market cap sizes.

Direxion All Cap Insider Sentiment Shares (NYSEARCA:KNOW)

This ETF also looks to expose investors to companies with favorable insider buying trends, focusing on insiders that own at least 5% of any S&P 1500 company. This is done by tracking the Sabrient All-Cap Insider/Analyst Quant-Weighted Index which also produces a fund that holds 100 stocks in its basket.

This index selects stocks based on the number of open market purchases by insiders and the percentage increase in shares for each insider. The index also looks at the number of positive revisions to price appreciation estimates, and then combines this with traditional metrics that focus on growth and value in order to come up with the 100 stocks.

Investors should also note that the product doesn’t use an equal weight methodology like its NFO counterpart. Instead, the product utilizes a strategy which weights the top 50 stocks from 2.6% to 0.96% while flat-weighting the bottom 50 stocks at 0.35% each (also read Try Value Investing With These Large Cap ETFs).

Top holdings in this fund include Valero Energy (NYSE:VLO), Assurant (NYSE:AIZ), and Western Digital (NYSE:WDC), none of which account for more than 2.75% of assets. Still, the product is tilted towards financials (24%), industrials (21%), and energy (19%), while it light in consumer staples and health care.

In terms of cap exposure, this product also has a heavy focus on small and micro caps. These two segments account for 48% of the total, leaving 23% for large caps and roughly 29% for mid cap securities.



Expense Ratio 0.65% 0.65%
Number of holdings 100 100
Volume (Daily Average) 27,100 2,100
Biggest sector Consumer Cyclical (21%) Financials (24%)
YTD Return 1.4% -1.8%

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Written By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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