Warren Buffett suggests that you invest in the businesses you know. Famously, he was derided in the late 1990s for not jumping on the dot-com bandwagon.
Still, sometimes you want options for what you don’t know. Will Twitter ever achieve the ascendancy of Google, or even Facebook, or will it have its wings clipped, Icarus-like? Think Groupon.
The ETF sleeve can prove to be remarkably expansive for cheap implementation of investment ideas. Some hedge fund managers will buy their good ideas, but neutralize the market effect by shorting a sector ETF – in technology for example. Or one could use inverse ETFs.
But that takes more skill, time and perhaps capital than most retail clients have available. This is where rules-based rather than index-based strategies come into play.
There are a few hedge fund replication ETFs in the U.S. marketplace. One is called Global X GURU (GURU), and it seeks to track the top holdings of hedge fund managers, as disclosed in filings with the Securities and Exchange Commission.
Another is called IQ Hedge Multi-Strategy Tracker ETF (QAI), a fund of funds that seeks to emulate the original Alfred Winslow Jones strategy: buy good stocks on margin and short bad stocks to earn a low-volatility return.
Of the two, according to ETF.com (formerly Index Universe), GURU has delivered the returns, while QAI has delivered low volatility – and not much else.
Back to Twitter. Most experts recommend against investing in IPOs. They often go through an initial pop and then fade to mediocrity. Or worse, they swoon halfway through their first trading day. And yet, Google turned out to be the exception.
There are a couple of IPO-focused ETFs available: the Renaissance IPO ETF (IPO) and First Trust US IPO ETF (FPX). Turns out their 2013 performance differs perceptibly by the methodology that they used to weight Twitter, says ETF.com.
In the end, ETFs can present a lot of investment ideas. Whether they are ready-for-prime-time solutions is a different matter.