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A Spread of ETFs to Mimic Hedge Fund Ideas

Sweta Killa
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After nearly a decade of underperformance, big investors like Bill Ackman, George Soros, Carl Icahn, David Tepper, Larry Robbins, Leon Cooperman, Daniel Loeb, David Einhorn and Stanley Druckenmiller have managed to beat the broad market index this year. The group, often known as hedge funds and one that shifts composition from time to time, gained 0.39% through April as measured by the HFRI Fund Weighted Composite Index against the loss of 0.38% for the S&P 500.

As the top holdings from the latest 13-F filing are out, we take a glimpse at the ideas and holdings of the hedge funds that led them to outperform in the first quarter. Investors mulling over investing like billionaires could consider the ETFs that resemble their ideas.

Technology Remains a Hot Spot

Hedge Fund “Hot Dogs," which are defined as stocks that capture the maximum hedge-fund dollars, centers around the technology, media and Internet sectors. Topping the list is FANG stocks, acronym for Facebook FB, Amazon AMZN, Netflix NFLX and Alphabet GOOGL, which lost their charm in March, slipping into deep correction territory (down more than 10% from its latest peak) (read: Should You Buy Beaten Down FANG ETFs Ahead of Q1 Earnings?).

The beaten down prices have encouraged big investors to buy more shares of these stocks given their compelling valuation and encouraging fundamentals. In particular, hedge funds owned $19.4 billion in FB, $12.2 billion in AMZN, $8.5 billion in NFLX and $18.9 billion in GOOGL. FANG-based ETFs, namely PowerShares NASDAQ Internet Portfolio PNQI and First Trust Dow Jones Internet Index Fund FDN could be a compelling choice for investors. PNQI with a Zacks ETF Rank #3 (Hold) has the largest 32.8% share in this group, followed by 28.2% in FDN, which has a Zacks ETF Rank #2 (Buy).

Meanwhile, Apple AAPL remains the beloved stock of Warren Buffett’s Berkshire Hathaway as it purchased an additional 75 million shares in the iPhone maker in the first quarter, raising its stake to $44 billion or 5%. However, Bloomberg noted that institutional investors abandoned Apple at a rate not seen since 2008. As such, Apple dropped from the eighth position to the 18th on the list. In order to avoid single-stock risk, investors could look at iShares Dow Jones US Technology ETF IYW, which has top 17.2% exposure in Apple and a Zacks ETF Rank #2 (read: Let Your Portfolio Mirror Buffett's With These ETF Strategies).  

Software companies like Microsoft MSFT, Adobe Systems ADBE and Electronic Arts EA also gained hedge funds’ love with investments of $16.4 billion, $6.6 billion and $5.5 billion, respectively. Visa V and MasterCard MA are also among the top 20 holdings with investments of $8.2 billion and $5.2 billion, respectively.

Combining the top 20 hedge fund holdings in the tech sector, iShares North American Tech ETF IGM looks like a perfect choice. The fund offers exposure to electronics, computer software and hardware, and informational technology companies and has a Zacks ETF Rank #2.

Risk aggressive investors’ could focus on BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU that could generate outsized gains in a short span. The note seeks to offer three times leveraged exposure to the NYSE FANG Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of the next-generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The ETN is up 12.7% over the past one month (read: 5 Leveraged ETFs That Soared More Than 20% in April).

Healthcare Gains Love

Besides technology, healthcare is the second top choice of the hedge funds with bets on insurers like UnitedHealth Group UNH and Anthem ANTM. The move came due to the steep decline in their share prices after Jeff Bezos, Warren Buffett and Jamie Dimon announced a joint venture to curb medical costs. The pharmacy benefits managers Express Scripts ESRX and CVS Health Corp CVS also became friends of hedge fund managers as their stock price tumbled on speculation that Amazon could enter that business.

As such, waves of mergers and acquisitions have been heating up in the healthcare space that could change the landscape of healthcare business. This is especially true given that health insurers are trying to consolidate with pharmacy benefits managers to streamline and cut costs in the drug supply chain (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).

iShares U.S. Healthcare Providers ETF IHF and SPDR S&P Health Care Services ETF XHS could well mimic this hedge funds strategy. IHF provides exposure to companies that provide health insurance, diagnostics and specialized treatment, while XHS targets health care distributors, health care facilities, health care services and managed health care. IHF has a Zacks ETF Rank #1 (Strong Buy) and XHS has a Zacks ETF Rank #2.

Small Caps Regain Fervor

With small-cap stocks on a tear lately, as evident by the Russell 2000 Index’s new records, many might want to invest like billionaires in this space too. Although the hedge fund’s small-cap space is dominated by the health care sector, the top two stocks, Green Brick Partners Inc. GRBK and Mammoth Energy Services Inc. TUSK, based on ownership value as a percentage of market cap does not belong to healthcare.

The next are the three health-care companies, namely Genomic Health GHDX, Zogenix ZGNX and Retrophin RTRX, which showed that hedge funds had a 48% or greater ownership of the stock as a percentage of market cap. In particular, hedge funds added exposure to small-cap biotech companies like PTC Therapeutics PTCT, Pacira Pharmaceuticals PCRX, Strongbridge Biopharma SBBP, and Corium International CORI in the first quarter (read: 5 Market-Beating Small-Cap ETFs Trading at New Highs).

Given this, small-cap ETFs focused on the healthcare sector look intriguing. PowerShares S&P SmallCap Healthcare Fund PSCH and ALPS Medical Breakthroughs ETF SBIO are the biggest gainers in the healthcare as well as small-cap space, rising about 27% and 14%, respectively. PSCH has a Zacks ETF Rank #2 while SBIO has a Zacks ETF Rank #3.

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