Evaluating a Hot Hedge Fund Strategy ETF

Lately, ValuEngine has seen ticker GVIP (Goldman Sachs Hedge Industry VIP ETF) on several ETF strategists’ buy lists.  The fund’s strategy is intended to take advantage of the highest conviction holdings of “VIP Hedge Fund Managers.” Specifically, GVIP seeks to track the GS Hedge Fund VIP Index, which is constructed in accordance with a rules-based methodology derived from concepts previously developed by Goldman Sachs’ Global Investment Research division. The Index consists of fundamentally driven hedge fund managers’ “Very-Important-Positions,” which appear most frequently among their top 10 long equity holdings. Indeed, many hedge funds use strategies that go long “smart money” holding. By “smart money”, they generally refer to the most profitable hedge funds.  

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A brief summary of GVIP’s methodology: Hedge funds included in the index must hold over $100 million in US-listed stocks and be identified by Goldman Sachs’ research team as top “fundamentally-driven” performers.   The next step is to identify the 50 US-listed stocks that appear most frequently in the top 10 reported holdings of the hedge fund manager universe as reported in the most recent government-required 13-F filings.  The stocks are equally weighted in the index which is reconstituted and rebalanced quarterly. 

Juan de la Hoz of the Stamford Chemist CEF/ETF Income Laboratory reports that GVIP has consistently outperformed the S&P 500 Index since inception with the greatest out-performance coming in the last 9 months of 2020.  Data from the ETF Fact Sheets reflect similarly robust performance. This chart compares GVIP to IVV, the iShares S&P 500 Core Index Fund.   

ETF Expense Ratio  1-Year Ann. Tot. Return 

as of December 31, 2020

3-Year Ann. Total Return

as of December 31, 2020

GVIP 0.45% 44.00% 20.07%
IVV 0.03% 18.35%  14.14%

Moreover, in stark contrast to some of 2020’s top-performing ETFs that stumbled badly as the market rotated from growth to value, GVIP is off to a good start in 2021.  During the past 3 months, it added to its advantage since inception over IVV posting a return of 6.41% in comparison to 4.88%.  

Of course, past performance does not guarantee future results.  With that in mind, let’s take a look at the ValuEngine report on GVIP.  It is among just a handful of ETFs rated by ValuEngine with 5 Vs in contrast to 3 Vs for IVV.  Going inside GVIP, the top 10 holdings are:

Ticker  Company      Percent of Portfolio                 VE Rating    Industry Sector
EXP   EXPEDIA INC              2.40                                      3             Retail-Wholesale
BAC   BANK OF AMER CP    2.36                                      2              Finance
WFC   WELLS FARGO          2.34                                      3              Finance
FB      FACEBOOK INC-A      2.33                                      3          Computer and Tech
FISV   FISERV INC                2.29                                      3           Business Services
FIS     FIDELITY NAT IN        2.28                                      3           Business Services
BKNG BOOKING HLDGS.     2.26                                      3           Retail-Wholesale
MA     MASTERCARD INC     2.25                                      3           Business Services
MU     MICRON TECH            2.21                                      3         Computer and Tech
TDG TRANSDIGM GROUP   2.19                                       3           Aerospace

The slight differences in percentages of the portfolio for these two stocks are interesting. Given that they were set at 2.0% for each of the 50 stocks at the last reconstitution/rebalancing date, the differences reflect the relative performance of each stock compared with the portfolio in the past 5 weeks.  The two finance stocks, BAC and WFC, along with the three finance-related business services stocks are demonstrative of why GVIP continued to perform well.  The fact that these 5 selections were consistently among the top 10 holdings of the VIP Fund Manager set reflects the fund’s thesis relying upon the wisdom of the consensus of experts.  Comparing the sector weightings on page 3 of the ValuEngine reports confirms that the consensus of experts was ahead of the shift.  The Business Services sector weight for GVIP now stands at 10.9%, more than double the 5.1% of IVV.  I also note that the weight of Consumer Staples stands at 0% in comparison to the 5% held by IVV, indicating that the hedge fund managers see the upcoming period as one of economic expansion and a risk-on environment.

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As promising as any prospective holding may look, a savvy investor always looks at what could go wrong.  In his article, De la Hoz pointed out that the methodology of using 13-F filings is a bit backwards-looking as these documents can be filed as many as 45 days after the previous calendar quarter has ended.  Technological advancements in the hedge fund strategies could exacerbate this weakness.  For example, the Depository Trust Clearing Corporation (DTCC) now offers a data product called Investor Kinetics that provides information on what the largest hedge funds are buying and selling during the quarter with only a three-day lag, not a 45-day lag.  These data change daily, not quarterly.  This allows short-term traders using such a strategy to be more adroit than an index-based ETF which is unlikely to be able to reconstitute so frequently.  That lag could potentially ease into the strategic advantage GVIP has enjoyed so far.  However, at this point, my warning is simple speculation and GVIP’s resilience during the recent market rotation is reason enough to stay with it for the time being.

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My conclusion is that GVIP, classified by Morningstar as Large Cap Blend, is a worthy core holding.  As a quant, I am uncomfortable with a 50-stock portfolio being one’s only core holding.  Therefore, you might consider replacing 25% of a more diversified ETF such as VTI or IVV with GVIP but only if you are inclined to take on a bit more price volatility in exchange for an ETF with a track record of superior returns.  

By Herb Blank

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