Hedge Funds Are Piling Into These Five ETFs

Exchange-Traded Funds have become an extremely popular asset class among retail investors over the past decade. Not only do they take spare investors from the trouble of finding individual stocks that can outperform the market, but the lower fees they charge compared to actively managed funds ensures that investors get more bang for their buck. Although at Insider Monkey we mostly focus on hedge funds and their stock picks, of late, as ETFs have gotten more and more popular among hedge funds, we have also started tracking hedge fund investments in ETFs. Having said that, in this post, we will take a look at five ETFs, whose shares hedge funds tracked by us were buying in droves heading into the second quarter.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5. iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI)

– Investors with long positions as of March 31: 15

– Aggregate value of investors’ holdings as of March 31: $7.62 Million

The heavy decline that Chinese equities have seen since last year would have spooked a lot of investors, but not hedge funds, who were betting on a reversal in Chinese stocks during the second quarter. Their most preferred investment vehicle to do so was the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI), which seeks to track the investment results of an index composed of large-cap Chinese stocks that trade on the Hong Kong Stock Exchange. During the first quarter, the number of investors tracked by us with long positions in iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) increased by 10. Though the aggregate value of their holdings in it declined by $1.29 billion during that period, it can be partially attributed to the 4.3% decline in the ETF’s shares in the first quarter. As of March 31, the iShares FTSE/Xinhua China 25 Index (ETF) had an expense ratio of 0.74% and its top holdings included China Mobile Ltd and Tencent Holding Ltd.

#4. Market Vectors Gold Miners ETF (NYSEARCA:GDX)

– Investors with long positions as of March 31: 36

– Aggregate value of investors’ holdings as of March 31: $946.77 Million

With gold prices making a rebound, hedge funds flocked to buy anything related to the precious metal in the first quarter. This gold rush resulted in the ownership of Market Vectors Gold Miners ETF (NYSEARCA:GDX) among hedge funds tracked by us increasing by four and the aggregate value of their holdings in it appreciating by over 53% during the first quarter. Shares of Market Vectors Gold Miners ETF (NYSEARCA:GDX), which tracks the NYSE Arca Gold Miners Index, have come  down a little bit after the recent Federal Open Market Committee (FOMC). However, they are still trading up by 91% for 2016 currently. According to analysts who track the ETF, investors who wish to invest in it should wait for some time due to the possibility of a rate hike by the Federal Reserve.

#3. iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM)

– Investors with long positions as of March 31: 45

– Aggregate value of investors’ holdings as of March 31: $4.68 Million

Moving on, the number of investors tracked by us with long positions in iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) increased over 50% and the aggregate value of their holdings in it swelled by nearly $2 billion during the first quarter. The EEM has always been a popular investment vehicle for hedge funds that want exposure to the emerging markets as it boasts diversified access to over 800  large and mid-cap stocks from 23 developing countries across the world. Though iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM)’s stock performed poorly in 2015, it is showing signs of a reversal this year as it currently trades up 2.5% year-to-date. The ETF currently pays a biannual dividend of $0.50, which based on its last trading price translates into an annual dividend yield of 2.42.

#2. SPDR Gold Trust (ETF) (NYSEARCA:GLD)

– Investors with long positions as of March 31: 63

– Aggregate value of investors’ holdings as of March 31: $6.74 billion

SPDR Gold Trust (ETF)(NYSEARCA:GLD) was another beneficiary of the gold rush during the first quarter. Its ownership among hedge funds covered by us and the aggregate value of their holdings in it saw a massive increase of 80% and 42% during that period, respectively. SPDR Gold Trust (ETF) (NYSEARCA:GLD) is currently the largest physically backed gold exchange traded fund in the world. Since it tracks the price of gold rather than the stocks of gold mining companies like the Market Vectors Gold Miners ETF, shares of GLD have seen relatively less upside (15%) this year than shares of the latter. However, the returns of GLD look much better when compared over the last five years because while the Market Vectors Gold Miners ETF has lost nearly 60% of its value during that time, GLD is down only 21%. Hedge funds that reduced their stake in GLD during the first quarter included billionaire John Paulson‘s Paulson & Co, which reduced its holding by 18% to 4.77 million shares.

#1. SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

– Investors with long positions as of March 31: 99

– Aggregate value of investors’ holdings as of March 31: $15.44 billion

The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has always been the most popular ETF among hedge funds as it provides them with the easiest way to hedge their portfolios (by shorting it or buying ‘Put’ options). While the number of hedge funds covered by us that held long positions in this ETF increased by five during the first quarter, the aggregate value of their holdings in it came down by $10.78 billion – a drop of over 40% – during the same period. When this large drop in the aggregate value of hedge funds’ holdings in the ETF is compared with the marginally positive returns generated by the S&P 500  during the first quarter, it points towards the conclusion that several large funds were not much bullish on US equities heading into the second quarter. The world’s largest hedge fund, Ray Dalio‘s Bridgewater Associates, trimmed its stake in SPDR S&P 500 ETF Trust (NYSEARCA:SPY) by 2% to 10.32 million shares during the first quarter.

Disclosure: None