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Get Hedge Fund-Style Returns -- Without The Crazy Fees


Here at StreetAuthority, we're big fans of the theme known as "guru investing" because following the trading moves of proven money managers can yield outsized gains.

There is actually proof of such a notion: The Global X Guru Index ETF (Nasdaq: GURU) which launched in June 2012, is up a solid 75% since then, outperforming the S&P 500 Index by more than 20 percentage points. 

GURU Chart

GURU data by YCharts

Though this ETF buys and sells stocks that have popped upon the mandatory Form 13F statement of ownership lists, the strong outperformance may be attributable to a proprietary twist: Thanks to an undisclosed methodology, this ETF's managers are able to focus on the best ideas in their purview, what are considered high-conviction ideas.

As an example, they give a strong bias to the picks by hedge fund managers that show a buy-and-hold style, and avoid those fund managers that simply zoom in and out of various stocks at a rapid clip. 

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The best fund managers know that winning stock ideas often take awhile to ripen, and the most patient among them are often rewarded for their far-sightedness. 

There is another great reason to consider this fund. While hedge fund managers often adhere to the traditional "2 and 20" split (a 2% annual fee and a 20% cut of the profits), this fund charges a simple 0.75% annual expense ratio. That's a bit higher than the average ETF -- but appears worth it in light of the solid performance. 

Of course this fund has only been in existence during a solid bull market. It's unclear how such an approach would fare in a weak stock market. 

One of the charms of researching an ETF like this is the ability to peek under the hood and see what it owns. The key holdings, which are rebalanced every quarter, may make great investments in and of themselves. 

Right now, YPF (NYSE: YPF), Micron Technology (NYSE: MU) and Baidu.com (Nasdaq: BIDU) are the top three holdings. The fact that they are being pursued by some of the best and brightest minds in the industry means you should be researching them as well.

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Still, a focus on the ETF itself may be the best way to generate plus-sized hedge-fund-style returns, without all of that legwork.

Global X has been broadening the guru theme, launching the Global X Guru Small Cap Index ETF (Nasdaq: GURX) and the Global X Guru International Index ETF (Nasdaq: GURI) in March. The international fund is up around 7% since inception while the small-cap fund is trading flat over the past four months, compared  with a 5% gain for the S&P 500 in that time. All three funds sport a 0.75% expense ratio. 

Frankly, both of these funds have yet to gain meaningful traction in terms of trading volumes, so it's premature to recommend them. But it is useful to look at their portfolios to spot specific stock ideas. 

The international fund, which focuses on large-cap stocks, currently counts BlackBerry (Nasdaq: BBRY), Golar LNG (Nasdaq: GLNG) and Argentina's YPF as the current three top holdings. The domestic small-cap guru fund is focusing on Vanda Pharma (Nasdaq: VNDA), Banco Macro (NYSE: BMA) and Flamel Technologies (Nasdaq: FLML), which I recently profiled.

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To reiterate, these secondary GURU funds are interesting to track right now in pursuit of stock ideas, but they are not yet ripe enough to buy. But the more mature Global X Guru Index ETF certainly looks like a winner. My colleague Dave Goodboy provided a nice profile of GURU and a similar ETF last autumn, helping to further clarify why this Global X fund holds such great appeal.

Risks to Consider: Hedge fund returns have been tepid in recent years, in part because some fund managers were too cautious coming out of the Great Recession and have stayed too conservative ever since.  

Action to Take --> The appeal of these ETFs is that you do not need to pin your hopes on the moves from any particular fund manager. Many of these gurus have great years and bad years, and the ETF portfolio approach smoothes out the ups and downs.

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