Instead of buckling down and researching each company individually, investors can track an alpha-generating strategy through insider sentiment exchange traded funds that focus on companies that corporate insiders are investing in and analysts have raised forecasts on.
The Direxion All Cap Insider Sentiment Shares (NYSEArca: KNOW) tracks the Sabrient Multi-Cap Insider/Analyst Quant-weighted Index, which provides investors access to stocks that corporate officers, directors and shareholders who own more than 5% of each S&P 1500 stock are accumulating.
The ETF makes a monthly review of stock selections from the S&P 1500, selecting companies based on strong insider buying and favorable analyst ratings, or stocks that are expected to outperform.
Specifically, the quantitative selection strategy picks holdings based on the number of open market purchases by major corporate insiders and percentage gain in shares per each insider’s purchase; the number of positive revision to price appreciation estimates; and growth trends, valuations and earnings quality.
In general, most investors have a cursory overview of how a company performs, but corporate executives or high-stakes shareholders will typically be more involved or have more knowledge about the finances of the companies. Consequently, the average retail investor can gain greater exposure to those in the know through insider sentiment ETFs like KNOW.
The Guggenheim Insider Sentiment ETF (NYSEArca: NFO) provides an alternative option. NFO tries to reflect the performance of the Sabrient Insider Sentiment Index, which holds stocks that reflect favorable corporate insider buying and show analyst earnings estimate increases.
Both insider sentiment ETFs have 0.65% expense ratios. However, KNOW has a heavier tilt toward financials at 22.8% of the portfolio and technology at 20.8%, whereas NFO leans toward industrials 20.4% and consumer cyclical stocks 15.2%.