2 Insider-Buying ETFs: Very Different Returns

April 28, 2016

Insider-sentiment ETFs are designed around the idea that top employees within a company have a better view of its fundamentals. If they are buying their company’s own stock, it probably means the company is in good fundamental health, or the stock is a good value buy.

It’s almost like investing with an insider track. And that’s what investors like about these types of funds.

There are many buyback ETFs that largely fit that goal—funds like the $1.7 billion PowerShares Buyback Achievers (PKW | A-78), which own stocks from U.S. firms that repurchased at least 5% of their outstanding shares in the previous 12 months.

Same Index, Different Results

But there are two insider-sentiment ETFs that go head-to-head, each tracking a Sabrient index, and each delivering very different portfolios and returns over time.

The Guggenheim Insider Sentiment ETF (NFO | C-61) is the oldest of the two, launching roughly 10 years ago, and gathering about $88 million in assets to date. The fund tracks the Sabrient Insider Sentiment Index, a benchmark of 100 U.S. stocks drawn from 4,000 eligible stock that are selected by increases in earnings estimates and positive buying trends of corporate insiders.

NFO essentially buys when top executives are buying—based on public filings—and then looks for confirmation on forward earnings estimates “for a reality check,” according to ETF.com’s fund report. The fund is equal-weighted, and it tilts toward small and micro-cap names, increasing its risk profile relative to the market.

Other Uses Different Index

The Direxion All Cap Insider Sentiment Shares (KNOW | B-76) tracks the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index, comprising 100 companies chosen from the S&P 1500 based on trading by corporate insiders such as directors and officers—half of the portfolio is weighted exponentially; half is equal-weighted.

KNOW also looks for earnings quality, and the portfolio tilts toward midcaps, while large-caps are underrepresented. The fund, which came to market in December 2011, has $146 million in assets.

From a cost perspective, both NFO and KNOW charge 0.65% in expense ratio, but NFO trades with an average spread twice the size of KNOW’s, at 0.22%.

If these funds attempt similar outcomes for similar cost, their returns are not similar at all. Consider their two-year performance in the chart below:

That performance difference hinges on the small differences in approach. David Brown of Sabrient Systems recently spoke about what makes NFO and KNOW different, from an index level. You can read the full interview here, but some highlights include:

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