Hedge funds garner much attention, with many investors looking closely at what stocks are added to or removed from Icahn Capital or Lone Pine Capital portfolios. These and other “activist” investors often take a position in a company before actively advocating for corporate-level changes such as a stock buyback or spin-off. However, some hedge funds are also large holders of passively-managed ETFs.
As of mid-August disclosures, SPDR S&P 500 (SPY) was the most widely held ETF, with 99 hedge funds having exposure. This is not surprising to us as this is the largest and oldest ETF with $161 billion in assets. More than 200 million shares trade on a daily basis with $0.01 bid/ask spread. We think SPY is the preferred way of getting exposure to the S&P 500 index and is often used as a place to park assets while transitioning to other investments.
SPDR Gold (GLD) was the second most popular ETF among hedge funds, with 49 firms using this commodity ETF. However, while its $24 billion remains sizable, other investors have reduced their exposure to GLD year to date through September 15, 2015 by approximately $945 million.
With 46 hedge funds owning a stake, iShares Russell 2000 (IWM) was the third most popular ETF. Rather than focusing on larger developed international and emerging markets ETFs such as iShares MSCI EAFE (EFA) or Vanguard FTSE Emerging Markets (VWO), more hedge funds have used IWM to gain U.S. small-cap equity exposure.
However, with $9.5 billion in assets Bridgewater was one among the largest hedge funds tracked by S&P Capital IQ. VWO was the largest holding and comprised 41% of assets.
Pavle Sabic, S&P Capital IQ Director of Market Development and author of the quarterly Hedge Fund tracker report, noted that our clients typically use the report to get a holistic view of what the biggest pure-play hedge funds are buying and selling. The Hedge Fund Tracker report provides insights to where the ‘smart-money’ is flowing on a stock and sector level.
One of these hedge funds is Tudor Investments. In August, Tudor announced it recently increased its stake in iShares MSCI Japan (EWJ) in addition to CR Bard (BCR) and Facebook (FB).
Looking deeper into ETFs that are widely held, we find a number of sector and industry focused ETFs. Health Care Select Sector SPDR (XLV) and Utilities Select Sector SPDR (XLU) were held by 32 and 29 hedge funds, respectively. We think investors have used sector ETFs to overweight their portfolios relative to the S&P 500 index. However, while XLV experienced $2.3 billion in new assets from its broader investor base this year, XLU had $462 million in outflows.
Among industry ETFs, SPDR S&P Oil & Gas Exploration (XOP) was held by 31 firms, as they put on a bet that oil would rebound and stocks like Valero Energy (VLO) would benefit.
Meanwhile, just one fixed income ETF was among the top 20 ETFs held by hedge funds. iShares 20+ Year Treasury (TLT), which has average duration of 17 years, was part of 25 portfolios.
There are just 11 fixed income ETFs that trade on average more than 2 million shares on a daily basis compared to 77 equity ETFs. We think institutional investors are more focused on an ETF’s liquidity than other factors we use in our research including expense ratio, technical trends and a holdings review.