Using ETFs to Follow the Smart Money

Hedge funds and institutional investors have been riding the extended outperformance of the consumer sectors. Retail investors can also tap into what the so-called smart money is buying into through related hedge fund-replication exchange traded funds.

“Since 1990, the S&P 500 consumer staples sector has been among the best performers in the broader index, rising 6.2% on average,” Todd Rosenbluth, S&P Capital IQ Director of ETF Research, said in a research note. “Couple this with the market volatility experienced in the third quarter of 2015 that helped the dividend laden, low-beta sector to significantly outperform the broader market, it should be no surprise the ten largest hedge funds favored this sector, according to S&P Capital IQ’s Hedge Fund Tracker research.”

Pavle Sabic, Director of Market Development for S&P Capital IQ, found that consumer staples stocks were the most popular are in the latest quarterly 13F filings – the SEC Form 13F is a quarterly filing required of institutional investment manager with over $100 million in qualifying assets.

Among the top hedge fund picks, (NasdaqGS: AMZN) and Teva Pharmaceuticals (NYSE: TEVA) were the two largest purchases. On the other hand, information technology experienced the largest outflow for the third straight month.

“We think sizable buying in the consumer staples sector by hedge funds was a positive for the Consumer Staples Select SPDR (NYSEArca: XLP),” Rosenbluth added.

While investors may use the 13F reports to glean areas that hedge fund managers favor, there are also number of hedge fund-replication or ETF clones that do the work for you.

For instance, the Global X Guru Index ETF (NYSEArca: GURU), which includes high conviction picks taken from a select pool of hedge fund 13F information, includes a heavy 20.1% tilt toward consumer cyclical, along with 15.1% financials and 14.1% industrials. The tech sector is also relatively underweight to the S&P 500, partly due to recent hedge fund selling.