Exchange-traded funds are adopting strategies long used by hedge funds and holding companies, moving into areas once exclusive to big-name investors. Issuers are packaging these investments into liquid products for retail clients.
Many strategies replicate structural elements of hedge fund investing, such as futures-based exposure and options overlays. Some issuers now offer multiple funds that mimic the holdings of Warren Buffett or follow strategies from Bill Ackman, Stanley Druckenmiller, and others.
Adam Patti, CEO of VistaShares and manager of a Buffett copycat fund, said, "We don't want to have any kind of voodoo magic in there. We just want to be very transparent."
VistaShares has brought three such funds to market in the past year alone. Its VistaShares Target 15 Berkshire Select Income ETF (OMAH), launched less than a year ago, uses covered calls to generate monthly income. It focuses on the top 20 publicly traded companies owned by Berkshire Hathaway, with weightings reset quarterly and Berkshire always the top holding at 10%. The fund has an expense ratio of 0.95%.
Patti noted, "Typically, what you see is Berkshire lags in momentum markets, and it snaps back like a coiled spring in the value markets. So we'll be there with it."
Senior Morningstar analyst Dan Sotiroff said funds are also mimicking hedge funds using trend-following, buying assets that have outperformed recently. The most common products use futures contracts, which let managers take short positions and access diverse investments.
The iMGP DBi Managed Futures Strategy ETF (DBMF) aims to mimic hedge fund performance using derivatives. It has $2 billion in assets and is up 2.4% year-to-date. The Simplify Managed Futures Strategy ETF (CTA) uses long and short positions in futures and follows a CTA-based approach. It has $1.2 billion in assets and is up 2.75%.
Sotiroff added, "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. It's harder to use inside of an ETF, whereas there are futures contracts that do that exposure for you."