Invest like a Billionaire? by Attain Capital

When someone first starts investing, there is the sort of high that comes with it; a high that convinces you that you just might be the next Warren Buffet. Sure. You watched a couple investing tips videos on Youtube, and you think you found some ETFs (with extremely low or no fees) that no one else knows about.

The thing is, that feeling never really goes away. The overly active investors are confident that with a little hard work they too will eventually become Warren Buffet. We all know the likelihood of that, so instead the people at Direxion decided to take that idea and turn it into an ETF. What are we talking about? The newly launched Direxion iBillionaire Index ETF (NYSEARCA:IBLN). Now you can feel like you’re trading with the greats, without actually doing it. Here is the description:

“tracks an equal-weighted index of 30 US companies selected from the portfolios of 10 asset managers with a personal net worth of at least $1 billion.”

The ETF isn’t a month old yet so we can’t really discuss its performance, but this certainly isn’t the first type of ETF that seeks to track what the billionaries are tracking. As Dave Nadig pointed out on ETF.com, there’s also GURU and MOAT, which tracks those that are in a way, smarter than the average investor.

“Guru builds a portfolio based on the filings of large hedge funds, as reported in 13F filings. It’s another snickerworth idea, but naysayers are really the ones who should be snickered at here: The fund has pulled in nearly $500 million in just two years, while crushing the S&P 500 by more than 22 percent.”

Pulling in $500 million in two years? Outperforming the S&P by 22%? The Warren Buffet dream is alive and well.

“But that’s not the only successful example: Van Eck launched the Market Vectors ETF Trust (NYSEARCA:MOAT) in 2012 as well, based on the picks of the Morningstar equity analyst team, and it’s also beaten the S&P since its 2012 inception, by 4.56 percent.

IBLN takes things one step more active than either GURU or MOAT—it trolls through 13F filings for the personal holdings of the world’s wealthiest investors. The theory is, I suppose, that the 19 rich white guys they’re following all got at least the “rich” part from being smarter than the rest of Wall Street.”

And for the most part, these ETFs have outperformed the bull running S&P 500 over the past 5 years.

Billionaire

(Disclaimer: Past performance is not necessarily indicative of future results)

Chart Courtesy: ETF.com

So what’s the catch? Why isn’t everyone doing this that already hasn’t? Two reasons.

1. Most billionaires don’t invest in stocks only.

These ETF’s seek to outperform the S&P 500 during an already impressive bull run. But what’s going to happen when we experience a year of a bear market? Will these ETF’s also “outperform” then, losing more than the S&P?  Now, it’s probably not too much of a shot in the dark to think that these billionaires know how to diversify and get out of dodge when trouble is on the horizon. But there’s one problem with that – these ETFs track the stock holdings only of these billionaires. These ETFs don’t offer diversification of a portfolio, or have any insight into any hedges or offsetting positions used by the billionaires. And in the case of the hedge fund following funds – there is a delay in knowing when those funds get out of their positions. Isn’t there a saying along the lines of ‘timing is everything’.

2. Billionaires are sometimes wrong too.

In fact just last week, there was an article showing Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s largest 5 losses since 1980, and the numbers don’t look pretty.

Billionaire

(Disclaimer: past performance is not necessarily indicative of future results)

Table Courtesy: Ben Carlson’s Blog

The point is… are those IBLN, Global X Funds (NYSEARCA:GURU), and MOAT investors ready to see these numbers as well? Or are these investors ready to find something to put in their portfolio that protects them from that? People invest for countless reasons. Some invest because they want to make money. Some invest because they’re saving for their retirement. As long as this bull run continues, will those investors know the difference? Just remember. Everything is Awesome.

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”