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.
