Track Market Gurus With These 3 ETFs (GURU, QEH, ALFA)

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October 9, 2012 2:28pm NYSE:ALFA NYSE:GURU

Eric Dutram: With the markets hitting a rough patch, the path forward for equities seems incredibly uncertain. The Fed appears willing to do anything and everything to boost market confidence, but conditions on the ground are less favorable heading into the heart of Q4.

Many key companies are warning about their profits and not just those that are focused on international segments either. Firms with a more domestic focus are also trying to temper investor expectations, suggesting that we could be in for a bumpy earnings season and a broad slowdown in the market.

With this kind of a backdrop some investors have taken to investing like the professionals in order to hopefully mitigate risk and find the best picks in the market. After all, those who are managing millions or those who can shift perception based on their purchases and sales can have an advantage over the ‘regular’ investor (read Three Biggest Mistakes of ETF Investing).

Fortunately, large investment firms and hedge funds are forced to disclose their holdings and their portfolio moves on a quarterly basis. This system helps to give the average investor an easy way to match the investing styles from some of their favorite investing gurus.

The main drawback to this approach is that the holdings updates can often be somewhat stale, as managers can move in and out of a security before an update is required by the SEC. Furthermore, some gurus may be taking positions—be it in swaps, futures, or more exotic securities—that are difficult if not downright impossible for investors to match (read The Truth About Low Volume ETFs).

If that wasn’t enough, tracking one ‘master’ of the investing world may not really be enough diversification for some, as the picks could be heavily concentrated in a particular style or market segment. Given these realities, an ETF approach to tracking top investment managers could be an interesting way to go instead.

With this approach, the guesswork and selection of managers is done for you, allowing a solid and well diversified portfolio to be built that still focuses in on market guru predictions. Additionally, while fees are somewhat higher in this space than in the less involved segments of the ETF world, the cost is likely to be but a fraction of what investors currently pay for ‘true’ hedge fund exposure, meaning that these investments could be a low cost way to play the space.

Thanks to this, we have highlighted three ETFs below which look to track market mavens and their investment picks. While all three have a somewhat similar approach to the problem, there are some key differences which investors should be aware of before making a choice in this interesting, and potentially lucrative, segment of the ETF market:

Global X Top Guru Holdings Index ETF (NYSEARCA:GURU)

One way to target market experts is with Global X’s aptly named ‘GURU’ which follows the Top Guru Holdings Index. This benchmark is comprised of the top U.S. listed equity positions reported on Form13F by a select group of institutions, as determined by Structured Solutions AG.

Hedge funds are selected for inclusion from a pool of 1,000s and are picked based on the size of their reported equity holdings and the efficacy of replicating their publicly disclosed positions. Additional filters are applied to eliminate hedge funds that have high turnover rates for equity holdings, and then the stocks are screened for liquidity and equal weighted.

With this approach, GURU has roughly 50 stocks in its basket and is weighted towards tech, financials, and industrials. A nice mix of large and small caps comprise the fund while a number of nations are represented as well, giving GURU a global focus (read Five Great Global ETFs for Complete Equity Exposure).

It should also be noted that volume is rather light for this product while expenses come in at 0.75%. This suggests that the cost is somewhat higher than the stated expense ratio, but as you will read, this expense ratio is far less than some of the more ‘active’ products on this list.


This product looks to exceed the risk adjusted performance of roughly 50% of the long/short equity hedge fund universe, as defined by the HFRI Equity Hedge Total Index constituents. This approach includes looking at the Markov Processes International proprietary style analysis technique, patented hedge fund analysis software, as well as the manager’s knowledge of the space to determine which segments best represents the hedge fund industry.

The process will use ETFs for its exposure, giving it even more diversification. With this approach, the managers hope to also beat out the S&P 500 Index while still having lower risk levels than this key benchmark (see Three Low Beta ETFs for the Uncertain Market).

The fund is still quite new so holdings could be in flux, but it does have an interesting mix of bond and equity ETFs in its portfolio. At the top of the list is two bond ETFs, SHV and BIL, while two equal weight funds round out the rest of the top four with RSP and RYFaccounting for another 10% of the total assets.

As we alluded to earlier, the fund is quite new so AUM is pretty low while volume is quite spotty suggesting wide bid ask spreads. Meanwhile expenses, thanks to acquired fund fees and ‘other’ come in at 1.64%, putting it near the top from a cost perspective.

AlphaClone Alternative Alpha ETF (NYSEARCA:ALFA)

Another new fund on this list is ALFA, from the relative unknown issuer AlphaClone. Their only fund tracks the AlphaClone Hedge Fund Long/Short Index which looks to provide exposure to US Traded equities which hedge funds and institutional investors have disclosed significant exposure.

Securities are chosen for inclusion based on managers ‘Clone Score’, a proprietary ranking system from the advisor which looks to rate managers and thus allocate the most resources to the best ones. It should also be noted that the fund has the ability to employ a dynamic hedge so that the benchmark can either be 100% long or as much as 50% long and 50% short, depending on market conditions.

The fund is right around the others in terms of fees at 95 basis points a year while volume is quite low for this ETF as well. Correlation and standard deviation levels aren’t too meaningful at this point since the fund hasn’t been out for that long, but the fund has seen higher correlation levels than the others on the list, though its performance has been very good since its inception (Read The Five Best ETFs over the Past Five Years).

Currently, AAPL makes up the top holding in the ETF at just over 11% of assets while the rest of the top ten is rather spread out around the 2% level each. With this approach, the fund is heavily concentrated in technology, although consumer discretionary (21%) also makes up a big chunk, while health care and financials round out the top four with 10% each.

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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