Evaluating A Hot Hedge Fund Strategy ETF - April 2021

.The slight differences in percentages of the portfolio for these two stocks are interesting. Given that they were set at 2.0% for each of the 50 stocks at the last reconstitution/rebalancing date, the differences reflect the relative outperformance of each stock compared with the portfolio in the past 5 weeks. The two finance stocks, BAC and WFC, along with the three finance-related business services stocks are demonstrative of why GVIP continued to perform well. The fact that these 5 selections were consistently among the top 10 holdings of the VIP Fund Manager set reflects the fund’s thesis relying upon the wisdom of the consensus of experts. Comparing the sector weightings on page 3 of the ValuEngine reports confirms that the consensus of experts was ahead of the shift. The Business Services sector weight for GVIP now stands at 10.9%, more than double the 5.1% of IVV. I also note that the weight of Consumer Staples stands at 0% in comparison to the 5% held by IVV, indicating that the hedge fund managers see the upcoming period as one of economic expansion and a risk-on environment.

As promising as any prospective holding may look, a savvy investor always looks at what could go wrong. In his article, de la Hoz pointed out that the methodology of using 13-F filings is a bit backward-looking as these documents can be filed as many as 45 days after the previous calendar quarter has ended. Technological advancements in hedge fund strategies could exacerbate this weakness. For example, the Depository Trust Clearing Corporation (DTCC) now offers a data product called Investor Kinetics that provides information on what the largest hedge funds are buying and selling during the quarter with only a three-day lag, not a 45-day lag. These data change daily not quarterly. This allows short-term traders using such a strategy to be more adroit than an index-based ETF which is unlikely to be able to reconstitute so frequently. That lag could potentially east into the strategic advantage GVIP has enjoyed so far. However, at this point, my warning is simple speculation, and GVIP’s resilience during the recent market rotation is reason enough to stay with it for the time being.

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Disclaimer: Always read the fact sheets and/or summary prospectus before buying any ETF.

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