Beyond iBillionaire ETF’s Marketing Sizzle

October 01, 2014

Can an equal-weighted large-cap ETF make you invest like a billionaire?

In early August, Direxion Shares launched the Direxion iBillionaire Index ETF (IBLN), which aims to track the investments of billionaire money managers such as Warren Buffet and George Soros.

The name is a bit over the top, but it does serve a purpose, which is to help the fund gather assets. In about two months, the fund has grown to a promising $37 million. Aside from that, the iBillionaire ETF's respectable returns indicate this fund may be more than thickly-laid marketing.

iBillionaire's concept of imitating the smart guys isn't new. A number of similar funds are already on the market, including the Global X Guru ETF (GURU | B-57) and the AlphaClone Alternative Alpha ETF (ALFA | D-42), both of which strive to mimic the holdings of large and well-known hedge funds. iBillionaire tends to hold larger companies, which might explain why its returns so far a better than those of its two competitors.

In ETF.com's ETF Finder we classify these funds under "copycat" in the niche category. While all three ETFs have this model of imitation in common, the iBillionaire Index separates itself from the other two in its marketing, and that's worth looking at more closely.

Bloggers Take Note

The index is sold with a Take-No-Prisoners 'invest like a billionaire' pitch. The front page, past the disclaimer, says "Meet the Billionaires" and has a yearbook-like grid of iconic faces and names, ordered not in alphabetical order, but by net worth.

The index has its own app, so that fund-holders can follow the positions of these billionaires. The appeal of the whole theme is immediately accessible, and you can see how bloggers might want to write about this fund.

Where The Rubber Meets The Road

Beyond marketing, what exactly is this iBillionaire Index all about?

To begin, the universe of companies chosen to be included is determined by narrowing the field of billionaire investors down to 10 or less using a set of criteria, such as recent investment success, along with holding a portfolio that is varied and stable enough that the index can attempt to meaningfully follow their investments.

Once the field of billionaires is determined, the index examines each of their "13F" regulatory filings for positions held in U.S. equities of $1 billion market cap or larger. Among those companies, the 30 with the highest aggregate allocation among the chosen billionaire portfolios are selected for the index, and then evenly weighted in the portfolio.

The resulting portfolio is hardly a surprise, consisting of almost entirely U.S. large-caps companies, and in that vein, has a beta of 1.10 when compared to the S&P 500 Index. The index's equal weighting tilts it smaller than the S&P 500, contributing to its slightly higher beta.

When IBLN is compared to its competitors in the "copycat" space, ALFA and GURU, the differences in composition are summarized easiest by this table:

 

Ticker Weighted
Average
Market Cap ($B)
Large-Cap
(>12.9B)
Allocation
Number of
Constituents
IBLN 79 100% 29
GURU 52 61% 55
ALFA 53 53% 83

 

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IBLN's Large Cap Tilt

The iBillionaire Index tilts far larger than the other two, with a more concentrated allocation. Another difference of note is that ALFA's index, the AlphaClone Hedge Fund Long/Short Index at times will include short positions, while the other two indexes limit themselves to long only.

iBillionaire's composition comes with concerns as well. As Dave Nadig, ETF.com's chief investment officer, explained in a recent blog, potential investors should be wary of iBillionaire in a down market.

Investing like a billionaire implies that you'll turn your money into even more money, so ultimately, ILBN must have good returns.

Better Returns—For Now

Although it was only created 11 months ago, the iBillionaire Index has returned over 14 percent in that time, compared to the S&P 500 pulling in roughly 13.5 percent. In that same time frame, the indexes around which ALFA and GURU are built have returned 13 percent and 9 percent, respectively.

The new ETF tends to hold larger companies, which might explain why its returns so far are better than those of its two competitors.

Still, IBLN has an annual expense ratio of 65 basis points, or $65 for each $10,000 invested, which is less than either ALFA's 95 basis points and GURU's 75. Those differences can add up over time. It should be noted that funds following the S&P 500 usually cost much less than any of these (although none of them come with apps).

Still, the iBillionaire Index is less than a year old, so view any performance cautiously.

The future is always hazy, but, as it stands, iBillionaire comes with a loud, clear pitch that is sure to turn heads far enough to give it an honest shot to take off. Keep an eye on it.


At the time this article was written, the author held no positions in the securities mentioned. Contact Chris Vinyard at [email protected].

 

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