Exchange-traded funds are a great investment vehicle that is suitable for many investor profiles. They are perfect for new and inexperienced investors, who can generate substantial returns without having to engage in complex analysis and are the optimal choice for investors seeking to build a retirement portfolio, without having to constantly manage it. Large institutional investors also like certain ETFs and use them to diversify their portfolios. That’s why ETFs are all the rage on Wall Street right now, with the total amount of capital poured in them exceeding $2.50 trillion last year. In 2007, billionaire Warren Buffett made a bet that the S&P 500 Index would outperform hedge funds over ten years. Essentially, the best suggested that active investment management by professionals would underperform the returns of passive investing. Needless to say that he won that bet.
ETFs represent securities that offer the possibility to own a basket of stocks, or other investments. Essentially, by buying shares of an ETF, an investor gets exposure to a variety of strategies, indexes, or even bonds or commodities. ETFs also have low fees, unlike mutual funds that are actively managed by professionals and they have the same properties as stocks and can be bought through online brokerages. In addition, ETFs are required by law to be transparent, so they publish their holdings every day, as compared to mutual funds, which disclose their portfolios periodically. All in all, ETFs offer a lot of advantages to individual investors. Unsurprisingly, they are the favorite security among millennials. According to a BlackRock survey, 70% of young Americans between 21 and 35 were planning to invest in ETFs last year.
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On the other hand, hedge funds have mixed feelings about ETFs. In 2015, Carl Icahn of Icahn Capital criticized high-yield bond ETFs and Bill Ackman of Pershing Square mentioned “index fund bubble” in a letter at the beginning of 2016. Last year, Seth Klarman of Baupost Group said the more people start to invest in passive funds, the more inefficient the market would become, and Arik Ahitov and Dennis Bryan, the managers of the FPA Capital Fund, called ETFs “weapons of mass distruction”. Given the outflow of money from active funds into passive, the frustrations of active managers are understandable. And their reasoning is also not without basis, because, after all, ETFs have become popular fairly recently and have yet to show how they can withstand some turmoil.
Nevertheless, some hedge funds appreciate the low costs and diversification that comes with ETFs. At Insider Monkey, we follow over 650 hedge funds and compile data from their quarterly 13F filings in order to see their collective sentiment towards various stocks. The main reason we use this data is to identify the best stocks to invest in as part of our market-beating strategy (read more details here). However, we can also see the number of funds that are invested in other stocks, including ETFs.
With this in mind, let’s take a look at four ETFs that not only rank as the most popular among the investors in our database, but which also saw an increase in the number of bullish investors over the last year.
The most popular ETF among the investors in our database is SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and it has always been the most popular. While many hedge funds hold ‘Put’ options underlying SPY for hedging reasons, there are also many funds that are long the ETF. At the end of the third quarter of 2017, there were 82 funds long SPDR S&P 500 ETF Trust (NYSEARCA:SPY), up from 73 funds a quarter earlier. At the beginning of 2017, there were 86 funds holding shares of SPDR S&P 500 ETF Trust (NYSEARCA:SPY). The key benefit of holding shares of SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is diversification and its performance roughly mimics the returns of the S&P 500 Index, which makes it a great holding in a bull market.
Then there’s iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), which offers market-cap-weighted exposure to the Russell 2000 Index, which includes the a broad basket of small-cap stocks and is considered the benchmark for funds that invest in small-caps. iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) has a very large portfolio given the index that it tracks and is highly diversified across sectors, with Financial Services, Technology and Healthcare amassing the largest shares. Given the healthy state of the US economy and the recent tax cuts, small-cap stocks should see a good year and iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is the best by offering exposure to the benchmark index of the small-cap space. At the beginning of October, there were 54 investors tracked by us long iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), compared to 42 funds three quarters earlier.
Holding gold is a great way to diversify a portfolio in addition to stocks and bonds, but buying physical gold is cumbersome and holding gold futures or gold certificates also has its drawbacks. Nevetheless, gold serves as a great protection in periods of market turmoil. SPDR Gold Trust (ETF) (NYSEARCA:GLD) is an ETF that tracks gold prices and offers investors the possibility to get exposure to the commodity in a more convenient way. Given the multitude of opinions that the market is overheated and the correction is underway and the continuing weakness in US dollar, gold prices might climb higher as investors are looking for safe havens. There were 43 funds from our database long SPDR Gold Trust (ETF) (NYSEARCA:GLD) at the end of September, up from 39 funds at the end of June, although a year earlier there were 64 funds long the ETF.
Emerging markets went through a comeback in the last couple of years as commodity prices started to increase and several important countries in this sector, such as Brazil, have returned to economic growth and overcame political gridlock. In this way, emerging markets look like compelling investments, although they are still risky and might not be so attractive as central banks in developed countries are tightening monetary policies. iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) is the ETF that offers a broad exposure to emerging markets as it holds 47% of its portfolio invested in emerging Asian countries, 12.30% in Latin America and nearly 8% in Middle East and Africa. Hedge funds in our database also warmed up towards emerging markets last year, as during the first nine months, the number of funds long iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) went up to 31 from 22.
Disclosure: none
