The Direxion iBillionaire Index ETF tries to reproduce the investments of Warren Buffett and other billionaires. But that could lead to buying stocks they once had and no longer hold.
THE DIREXION IBILLIONAIRE INDEX ETF (symbol IBLN on New York; www.direxioninvestments.com) is designed to profit from copying the moves of billionaire investors such as Warren Buffett, Carl Icahn, Daniel Loeb and David Tepper.
The ETF began trading on August 1, 2014. Its MER is 0.65%—lower than most mutual funds, but high for an ETF.
The Direxion iBillionaire Index ETF selects up to 10 billionaire investors from a pool of 50, based on their personal net worth, source of wealth, stock turnover and performance over time. It then selects stocks from their investment firms or hedge funds.
Each of the companies in the index is equally weighted (3.33% each) and rebalanced quarterly. That’s because the ETF’s managers aim to ensure that each stock’s contribution to the fund’s performance is identical.
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The fund’s managers select stocks by looking at Form 13F, a publicly available document that institutions, such as banks, hedge funds and investment firms, must file with the Securities and Exchange Commission (SEC). Form 13F discloses long positions, or stocks held with the intention of profiting if their prices go up.
The fund’s holdings are: Apple, AbbVie, Allergan, Amgen, Amazon.com, Baxter International, Constellation Brands, Delta Airlines, Dow Chemical, Endo International, Facebook, General Motors, Goodyear Tire & Rubber, HCA Holdings, Humana, JPMorgan Chase, Kraft Heinz, Mohawk Industries, Monsanto, Microsoft, Mylan NV, Priceline Group, Perrigo Co., PayPal Holdings, Starwood Hotels, Thermo Fisher Scientific, Time Warner, Walgreens Boots Alliance, Whirlpool and Yum! Brands.
ETFs: Billionaire fund holds Apple, PayPal
Piggybacking on the investments of the rich is harder than it sounds, however, even with the help of Form 13F. For one thing, institutions have 45 days to file the form after each calendar quarter ends. If a billionaire buyer loaded up on a stock in the first week of January this year, Form 13F will only report on it in mid-May. By then, the billionaire buyer may have started to sell.
As well, 13Fs only disclose long holdings—stocks that the reporting institution owns. But hedge funds and billionaires sometimes offset their long positions with short sales. For example, a hedge fund may sell Alphabet short, to offset a “long” position on Microsoft. The hedger may think they are both overpriced, but that Alphabet will plunge sooner and further than Microsoft. But Form 13F would only disclose the long position in Microsoft. That gives investors, including managers of the iBillionaire ETF, an incomplete and misleading picture.
Another drawback of this continual rebalancing is that it costs money. The ETF has to absorb brokerage commissions and other transaction costs with each buy and each sale. As well, because it aims to keep each holding equal, it may add to its holdings of poor performers just because they’ve dropped in price, even though further declines may lie ahead. It also has to sell stocks that have gone up, perhaps missing out on some of these stocks’ biggest gains.
This ETF’s approach simply leads it to buy stocks that some billionaires have bought and may still own. There are many ways to pick stocks, and this one doesn’t inspire our confidence.
TSI Network recommendation: SELL
For our recent report on why you won’t hear about closed-end funds from many brokers, read Closed-end funds offer “stocks at a discount”.
For our view on a “defensive” ETF that’s based on a misleading measure of risk, read BMO Low Volatility ETF—inadequate defense against future risk.