The easiest way to “invest like a billionaire” would be to start with a billion dollars.
Since you don’t have that, your latest way to invest like the super-rich involves a new exchange-traded fund with an appealing methodology.
The question is whether it’s a gimmick or if it actually works.
The Direxion iBillionaire Index ETF (ticker symbol: IBLN) has just opened, tracking an index made of 30 large-cap stocks that – when viewed through the lens of filings made with the Securities and Exchange Commission – appear to be the favorites of guys like Warren Buffett, Carl Icahn, David Einhorn and George Soros.
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You could make a case that having rich successful guys “select” stocks – even if the iBillionaire index is a reflection of their public trading activity rather than any actual purchase recommendation – is a better idea than having three guys picking the stocks that make up the Dow Jones Industrial Average. In fact, iBillionaire president Raul Moreno makes just that case.
If you buy that argument, then you might believe that the folks at Direxion have found the proverbial “better mousetrap,” and that money will flock to the iBillionaire fund.
A few years back, however, Andrew Hargadon, an entrepreneurship expert who teaches at the University of California-Davis, noted that the U.S. patent and trademark office had issued over 4,400 new mousetrap patents since it opened in 1828, but that only two dozen of those ideas “have made any money, and only two designs have ever dominated the market.”
In short, even if you have designed a better mousetrap, the world may not agree and rush to your door.
And in the case of the iBillionaire ETF, there’s a good chance that investors will come away feeling like this is more marketing ploy than something to buy.
Moreno, however, disagrees. Moreno noted that investors are already trying to follow investment geniuses, but that “this makes it much easier to do,” and it doesn’t force the investor to rely on any one particular expert.
The fund equal-weights the stocks, meaning each of the 30 holdings accounts for 3.33 percent of the overall portfolio. That means it’s making high-conviction bets not only a Micron Technology – which amounts to 0.17% of the Standard & Poor’s 500 – but on big names like Apple Inc. , which represents 3.14 percent of the S&P.
But with names like Apple, eBay, Mastercard, Dow Chemical, Halliburton and Google, it’s hardly like the billionaires’ secret sauce is delivering unique ideas.
In fact, the iBillionaire holdings seemed pretty similar to me to the issues in the latest myMom index. You won’t find that one online or anybody making an ETF about it soon, but it would be the index of 30 names that my own mother either owns or is most interested in chatting about every time we get together.
If you called the iBillionaire benchmark what it is, it would be known as the “30 stocks that rich guys like” index.
That may or may not be better than the process that’s behind the Dow Jones Industrial Average, though it will take years to know.
Moreno pointed out that the index itself has been a solid performer since it was launched last November, comfortably beating the S&P, and that he expects that to continue because “if you look individually at the billionaire’s portfolios – like Warren Buffett, Carl Icahn, George Soros – they have outperformed the S&P over a long period of time, and that’s why people follow them and why we created the index.”
One place to look for a quick comparison is similar funds, and IBLN is a variation on a theme started by the Global X Guru Index ETF (GURU), which opened in 2012 and now has about a half-billion dollars in assets. The guru fund tracks an equal-weighted index that attempts to mimic concentrated equity positions taken by large hedge funds, as reported in SEC filings; that’s the same basic concept as iBillionaire, but with 75 experts instead of 20 billionaires.
In 2013, the Guru fund was the top issue in its category, according to Morningstar Inc.
This year, it ranks dead last.
It hasn’t lost money – and it is still outperforming the S&P sharply since inception – but it’s pretty much in line with the average large-cap fund since it opened, despite one year of superior results.
In other words, thus far, it has mostly proven to be a “different” mousetrap.
Whether the iBillionaire fund can escape that label and prove to be superior to the competition is a long way off.
First it must attract enough assets to survive, which in the world of ETFs means luring in excess of $50 million in short order; there, the success of GURU would be a strong positive.
Then, it must deliver performance that inspires confidence, that makes the public feel that “invest like a billionaire” is an actual strategy, rather than a slogan, the kind of numbers that show that when you put these colorful big names together – and none of the billionaires is actually affiliated with the index or the fund in any way – you get the best of their insights rather than a puddle of mud.
Given enough time, the strategy indeed may prove itself to be better than the Dow Jones and/or S&P, but right now it feels like an idea for people who don’t want to do research or homework themselves, but who want to invest like that guy they know with a lot of money.
If that feels like a schtick instead of a strategy – and it does to me – then avoid the fund until it’s proven. If you love the idea, however, you can take a chance and dive in; just remember that the experience pool is shallow and that nifty ideas may make for good marketing hype but they don’t always turn into good funds.
Chuck Jaffe is senior columnist at MarketWatch. He can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.