Even Hedge Fund Legends Make ETF Mistakes
It is safe to say that legendary investors such as Ray Dalio, George Soros and John Paulson did not become legends by making a lot of mistakes. Investing is not baseball, meaning the great players have to be great more than 30 percent of the time.
Typically, the greatest names in the hedge fund business are great a lot more than 30 percent of the time. However, that does not mean they are perfect. Every investing legend has had a flub or two along the way, which implies these guys are human, too.
One area where some hedge fund giants are making mistakes is with ETFs. Not by using ETFs, but with the ETFs they are choosing. Here are some examples of the mistakes, admittedly some are small, that big-time hedge fund managers have made with ETFs.
SPDR Gold Shares (NYSE: GLD) The SPDR Gold Shares is the second-largest ETF in the world as ranked by assets under management, so it is not surprising this fund finds its way into the portfolios of pros and retail investors alike. Paulson's Paulson & Co. held 21.8 million shares of GLD at the end of the second quarter.
That is not a bad bet at all given that gold has been surging recently on speculation of a third round of quantitative easing. However, long-term gold investors, of which Paulson appears to be one, are better off with the iShares Gold Trust (NYSE: IAU). IAU charges just 0.25 percent per year compared to 0.4 percent charged by GLD. Year-to-date, IAU has outperformed GLD by nearly 30 basis points.
It is not just Paulson making this minor error. Soros also held a stake in GLD at the end of the second quarter.
Financial Select Sector SPDR (NYSE: XLF) Like GLD, the financial Select Sector SPDR is a large, familiar ETF. With $7.2 billion in AUM, XLF is the largest ETF tracking major bank stocks. With an expense ratio of 0.18 percent, XLF is also the cheapest financial services ETF. Neither factor makes XLF the best financial services fund.
Tudor Jones Investment, the hedge fund managed by Paul Tudor Jones, took a stake of 8.66 million shares in XLF in the first quarter. That position has performed well, but in the past three months XLF has been slightly outpaced by the SPDR S&P Regional Banking ETF (NYSE: KRE) and thoroughly trounced by the PowerShares KBW Bank ETF (NYSE: KBWB). The difference between KBWB's and XLF's 90-day performance is nearly 300 basis points.
iShares MSCI Brazil Index Fund (NYSE: EWZ) EWZ, the largest ETF tracking Latin America's largest economy, was on the receiving end of some positive pressafter it was revealed Ray Dalio's Bridgewater Associates took a stake in the fund during the second quarter.
Bridgewater bought 2 million shares of EWZ during the second quarter at average price of $56. Based on current prices, the position is slightly underwater. No big deal since Bridgewater has $120 billion in AUM, meaning EWZ accounts for a scant percentage of its total portfolio.
Still, the Market Vectors Brazil Small-Cap ETF (NYSE: BRF) would have been the better bet for Dalio. BRF has outperformed EWZ since the start of the second quarter. In the past 90 days, the difference is 630 basis points in favor of BRF.
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