Claymore/Sabrient Insider ETF: How Reliable Is Executive Buying Info?

Mark Hulbert, founder of Hulbert Financial Digest, has been tracking newsletter writers since 1980. He also checks whether board room executives are buying or selling (i.e., insider activity).

Mr. Hulbert has uncovered a distinct difference between gurus (stock market writers) and CEOs (execs). More specifically, when the majority of newsletter advice-givers are upbeat about stocks, the stock market tends to falter. In contrast, when board room executives are buying up shares of stock, the "insider" buying tends to predict good things for stock assets.

Why is this important to ETF investors? For one thing, according to Hulbert, the majority of newsletter writers are exceptionally bearish (i.e. down on stocks). Historically, this has been a contrarian indicator such that, stocks tend to rally. Secondly, the majority of insider executives are more bullish than they were 3 months ago. Historically, this suggest that stocks should do rather well.

Granted, historical indicators and contrarian indicators are far from perfect. Maybe the newsletter writers are going to be right, and the slow growth/no growth environment will take stocks into a full-fledged bear.

That said, it's difficult to ignore insider sentiment completely. If CEOs at large see opportunity, the stock market may make its way through the volatility and debt scares yet.

Is it possible to profit directly from insider thinking? Claymore actually developed an ETF in late 2006 that uses a 100-stock insider sentiment index that is based on public filings of corporate insiders.

Unfortunately, the Claymore/Sabrient Insider (NFO) has been all over the map since it came to the ETF arena. Worse yet, it's entrenched in "correction" territory, more than 15% below its October high.

Keep in mind, the Claymore/Sabrient Insider (NFO) uses a proprietary method developed by Sabrient Systems for tracking executive sentiment. Therefore, while NFO may only offer low-volume, erratic exposure to what the broader S&P 500 (SPY) is doing, it does not mean that "insider sentiment" is of little value.

According to Hulbert, insiders do indeed prove valuable because they understand their products/services/competitors/marketplace better than the rest of us. What's more, in spite of all the bad economic news that has poured in over recent weeks, corporate insiders are still buying more than they are selling.

If one is inclined to believe that the bearishness of newsletter gurus is overdone, and the bullishness of insider executive buying is flying under the radar, then one might invest in broad market indexes. Chiefly, the S&P 500 (SPY) and the Vanguard All-World Index (VEU). Both represent better ways to capitalize on insider sentiment than Claymore/Sabrient Insider (NFO).

Comments

[300mph:]

Well here we go again. Another harebrained idea from the investment marketing world that turns out to make the investor less money. I can buy the SPY and pay .1% yearly fees, or I can buy NFO and pay .6% in fees and lag the S&P 500. Let's see now, what should I chose?

2008 Jan 09 06:12 PM