But secondly — and most importantly — its holdings are limited to constituents of the S&P 500. Per iBillionaire,
“It is composed of the top 30 large-cap equities listed on the S&P 500 in which financial billionaires have allocated the most funds, providing ample trading liquidity, a well-known benchmark, and better results to equity indexation than capitalization-weighted indices. Devised from 13F filings, the iBillionaire Index provides investors an efficient and effective way to follow the smart money. In essence, the index works as though one gathered a group of billionaires and asked them to come to a consensus as to which S&P 500 stocks are the best bets.”
With that said, which guru-following ETF strategy is best?
It’s really going to depend on the kind of market you’re in and what you’re using as a benchmark. ALFA’s ability to go short is a tremendous asset in a sustained bear market and will almost certainly cause it to outperform GURU and iBillionaire’s index. But in a sideways market or a volatile zig-zagging market (not exactly technical terms, but bear with me), it’s going to get whipsawed. It’s the curse of all trend-following models — they only work in a trending market. And in a long bull market, it won’t have any effect at all.
ALFA also has a small market-cap bias; Morningstar classifies it as a “mid-cap growth fund.” GURU is considered a “large-cap” growth fund by Morningstar. iBillionaire — when its ETF is released — will likely have an even greater large-cap bias, as its mandate limits it to companies within the S&P 500.
I’ll summarize like this: If you think we might see a prolonged bear market, ALFA is the ETF for you; if not, GURU or an ETF based on the iBillionaire Index would likely be your better option.
Right now, this is all conjecture based on the limited facts that are available. iBillionaire’s ETF is not on the market yet, and GURU and ALFA both have very short trading histories. So I cannot tell you how any of these strategies would have performed under real-world conditions other than by using sponsor-provided backtested data. This is something I plan to revisit as real trading history data becomes available with time.
In any event, guru ETFs have another beneficial use. Rather than use them as “one stop shops,” you can use the ETF holdings as a starting point for futher research. You may find some real gems that are worth holding as individual stock positions.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.