These ETFs Take a Page Out of Famed Investors’ Playbooks

Hedge funds and holding companies were long an exclusive club. Now, exchange-traded funds are sneaking in the side door.

ETFs are increasingly adopting strategies long associated with big-name investors as issuers look to package their investments into liquid, retail-friendly products. Most of these strategies replicate the structural elements of hedge fund investing, like futures-based exposure and options overlays. Some issuers now have several such funds, mimicking the holdings of Warren Buffett as well as hedge fund strategies from Bill Ackman, Stanley Druckenmiller and others. It’s a growing trend in ETF investing that is trying to replicate the returns of the most famous investors on the planet.

“We don’t want to have any kind of voodoo magic in there,” said Adam Patti, the CEO of VistaShares and manager of the Buffet copycat fund. “We just want to be very transparent.” 

Trendsetters, Trend Followers

Vistashares has brought three such funds to market in the past year alone. The company’s VistaShares Target 15 Berkshire Select Income ETF (OMAH), which launched less than a year ago, uses covered calls to generate monthly income for shareholders using the top 20 publicly traded companies that Berkshire Hathaway owns, with the weightings reset quarterly and Berkshire always the top holding, at 10%. It also has a hefty expense ratio of 0.95%.

“Typically, what you see is Berkshire lags in momentum markets, and it snaps back like a coiled spring in the value markets,” Patti said. “So we’ll be there with it.”

OMAH God. There are also funds looking to mimic hedge funds using trend-following, according to senior Morningstar analyst Dan Sotiroff, meaning they buy assets that have outperformed recently. The most common type of product that does this uses futures contracts. These contracts let managers take on short positions in certain asset classes and open the products up to more diverse types of investments, Sotiroff said. The two largest funds in the managed futures category are:

• The iMGP DBi Managed Futures Strategy ETF (DBMF), which aims to mimic the performance of a group of hedge funds using derivatives, has $2 billion in assets and is up 2.4% YTD.
• The Simplify Managed Futures Strategy ETF (CTA), which uses long and short positions in futures and also takes a CTA-based investment approach, according to its prospectus, has $1.2 billion and is up 2.75%.

“It’s not just stocks and bonds. [Futures contracts allow managers to] get into things like commodities and currencies that you don’t have explicit access to in other ETFs,” Sotiroff said. “It’s harder to use inside of an ETF, whereas there are futures contracts that do that exposure for you.”