New Smart Money ETF Clones

by: AlphaClone
By Maz Jadallah

We're excited to introduce our latest fund group, AlphaClone ETF 100. The group combines 100 fundamentals-driven institutional and hedge fund managers and then screens them for just ETF ideas. The result is that clones generated from the group are made up of ETFs only. Those of you familiar with our core strategies will recall our using a similar approach with ADR securities in our AlphaClone ADR 100 group.

By combining the ETF picks of institutional investors with those of fundamentals-driven hedge funds, the group attempts to merge the more strategic geographic and asset class allocation strategies of institutional investors with the much more tactical sector and commodity preferences of long/short equity hedge funds. The backtest results are impressive.

Let's take the group's Top 10 Popularity clone and look at that clone's current holdings (see table below). As you will recall, our popularity strategy takes the most popular (widely held) holdings amongst the largest twenty holdings for each fund in the group (so it's popularity amongst the top holdings). Since this group screens for ETFs, only ETFs are counted when they appear amongst the twenty largest positions for any fund in the group. You can see how “popular” a holding is by looking at the “# of Funds” column in the table below.

Description Ticker Close
Return 2/19/10 to
# of Funds Clone Weight
Gold GLD $109.47 $115.73 5.7% 11 39.3%
Emerging EEM $39.38 $42.28 7.4% 3 10.7%
Emerging VWO $39.31 $42.32 7.7% 2 7.1%
South Korea EWY $46.54 $51.74 11.2% 2 7.1%
Gold Miners GDX $44.57 $49.88 11.9% 2 7.1%
India INP $60.40 $67.38 11.6% 2 7.1%
South Africa EZA $54.18 $60.59 11.8% 2 7.1%
Taiwan EWT $12.05 $12.83 6.5% 2 7.1%
S&P500 SPY $111.14 $120.35 8.3% 2 7.1%
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The clone's current portfolio is 40% allocated to gold [GLD] and 7% allocated to gold miners [GDX] – a very strong bearish signal from hedge funds with the obvious fears being over-extended markets, sovereign debt default contagion and inflation. Anybody watching the Greek “tragedy” unfolding over the past couple of weeks can attest to those fears. Conversely, the clone is very bullish on emerging markets (a common theme amongst the smart money) with nearly 17.8% allocated to emerging markets generally through the emerging markets ETFs [EEM and VWO] and several 7% allocations to specific country ETFs for India, South Korea, Taiwan and in anticipation of the effects of this year's World Cup, South Africa. Finally, the clone pans the US markets with only a 7% allocation to the S&P500 [SPY].

As instructive as the above allocations may be, it may be even more instructive to look at this clone's holdings back in early/mid 2008. The clone invested on 5/21/2008 based on disclosures for the 3/31/2008 quarter. So which ETFs ruled just months before the world wide economic storm?

Description Stock Close
# of Funds Clone Weight
Gold GLD $90.98 $82.30 -9.54% 7 50.0%
Russell 2000 IWM $71.07 $70.35 -1.01% 3 21.4%
Short Financials SKF $109.17 $132.17 21.07% 2 14.3%
Long Financials XLF $23.33 $18.79 -19.46% 2 14.3%
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The clone had a slightly higher exposure to gold [GLD] than it does currently but 7x the exposure to the US markets. What really stands out the most is the clone's market neutral stance on the US financials sector! It was 14% long financials [XLF] and 14% short financials [SKF]. By using an “inverse ETF” the clone effectively neutralized (“hedged”) that sector's 20% drop between the two rebalance dates on 5/22 and 8/21. All thanks to Harbinger Capital and Trian Partners who had SKF amongst their twenty largest holdings. Also interesting to note is that the XLF/SKF pair shows up again for the 9/30/2008 quarter (rebalance date in mid November). This time the pair is net long 2:1 the US financials sector! The net result was that in 2008, this clone was down 10.6% while the broader market lost nearly 40% (see table below).

How does the clone perform over time? Below are the clone's backtested returns in each year since 2005 vs. the S&P500 index with dividends and the clone's five year performance graph vs. the same index.

Yearly Returns (as of 5/3/2010)

2005 21.3% 4.9% 16.4%
2006 17.5% 15.8% 1.7%
2007 29.0% 5.5% 23.5%
2008 -10.6% -37.0% 26.4%
2009 16.4% 26.5% -10.1%
2010 6.4% 8.5% -2.1%
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ETF100 POP10 5y chart The clone returns 16% annualized at about the same volatility as the market but half the maximum drawdown and with only 60% correlation. Still, the clone's one year return is trailing the market slightly largely due to the clone's exposure to China (NYSEARCA:FXI) between 12/31/2009 and 2/19/2010. That ETF lost almost 8% over the period compared to a loss of only 0.7% for the S&P500 with dividends. It will be very interesting to see what this clone's holdings will look like for the upcoming rebalance period on 5/21 – only a couple of weeks away.