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Hedge Funds Love These ETFs

Exchange traded funds can be a great way for investors to get diversified exposure to a sector. Many ETF’s charge a low annual fee, lower than many mutual funds. Many ETFs are also liquid, allowing for a big institution to get in and out of a position easily. In this article, we examine the smart money’s top five favorite ETFs, including SPDR S&P 500 ETF Trust (NYSE:SPY), SPDR Gold Trust (ETF) (NYSE:GLD), Market Vectors Gold Miners ETF (NYSE:GDX), iShares Russell 2000 Index (ETF) (NYSE:IWM), and iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM).

Given that Insider Monkey has done a lot of research into what the smart money likes and doesn’t like, let’s also analyze relevant hedge fund sentiment toward the stocks. We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM)

– Number of Hedge Fund Holders (as of September 30): 31
– Total Value of Hedge Fund Holdings (as of September 30): $2.8 billion

Given that the billions of people in emerging markets such as India and Indonesia will eventually reach a middle income status and consume all the products developed nations do, many hedge funds are long the iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM), which gives investors diversified access to over 800 emerging market stocks that will do well when emerging market consumers have more purchasing power. Although shares of the index are down 16.5% as capital heads home due to rising U.S. Treasury yields, the ETF remains a good long term holding given the ETF’s reasonable expense ratio of 0.68% (lower than that of many mutual funds) and EEM’s underlying companies’ growth prospects.

#4 iShares Russell 2000 Index (ETF) (NYSE:IWM)

– Number of Hedge Fund Holders (as of September 30): 32
– Total Value of Hedge Fund Holdings (as of September 30): $960.96 million

Seeing as owning small cap stocks has historically been a good way to beat the market, shares of iShares Russell 2000 Index (ETF) (NYSE:IWM), an ETF that gives investors exposure to 2000 small-cap domestic U.S. companies, will likely be a good long term holding as its index components will grow faster than the S&P 500’s index components. With an expense ratio of 0.2%, the iShares Russell 2000 Index (ETF) (NYSE:IWM) is also one of the lowest-fee ETF’s on the market today. As an added bonus, shares of the IWM also trade for a reasonable 18.67 P/E ratio.

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