Most Popular ETFs Hedge Funds Are Crazy About

29 of the filers we track reported a position in the Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF). The four megabanks- which have all been recording strong results recently, and are fairly cheap in terms of forward earnings estimates- and Berkshire Hathaway make up nearly 40% of this ETF’s holdings. The sector has led the market slightly so far this year, though we would be a bit concerned about how dependent large banks might be on low interest rates. On average, the ETF’s holdings are trading at a small premium to book with a P/B ratio of 1.1.

The Market Vectors Gold Miners ETF (NYSEARCA:GDX) also made our list of hedge funds’ favorite ETFs. The thesis here had generally been that gold miners were lagging gold during the period that the commodity was rising, and that over time high prices should provide excellent returns for the miners on their investments. Investors also did not want to take the company-specific risk of buying individual gold miners which might be exposed to a small number of projects. The gold miners ETF is down more than 40% year to date, however, as falling gold prices have savaged profits for now at most miners.

Finishing off our list is the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ). This ETF is “hedged” in that it goes long Japanese equities but attempts to prevent fluctuations in the yen-dollar exchange rate from impacting returns. This ETF is up 49% in the last year, easily beating the S&P 500’s return and also about 20 percentage points ahead of the iShares MSCI Japan ETF, which presumably is not hedged in this manner. The bull case for Japanese stocks is that a cheaper yen, possibly helped by economic reforms, will be a boon for exports and for the company’s manufacturing sector in general.

Disclosure: I own no shares of any stocks mentioned in this article.