The Pros Like These 6 ETFs

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Few things have revolutionized investing in recent years more than exchange-traded funds. ETFs have opened up brand-new markets to individual investors, and they've made it a whole lot easier to take calculated positions on investing themes.

Many people see ETFs as the great equalizer for small investors. But big institutions that invest billions of dollars, including hedge funds, use ETFs as well. Keeping tabs on where they're putting their money can help you avoid trying to swim against prevailing currents, as well as provide insight into what some of the best minds in the business are thinking about current economic conditions.

Going to the oracle
When it comes to tracking what institutional investors are doing, the research service AlphaClone can provide all the answers you need in just a few clicks of your mouse. A couple of months ago, I took a look at what were then the most popular ETFs among the hundreds of hedge funds and institutional investors that AlphaClone tracks. But with the markets moving fast and a new quarter's worth of data available, let's take a look and analyze how the pros have responded.

Theme 1: Gold still shines
Last quarter, the SPDR Gold Trust (NYSE: GLD  ) topped the list of favorite institutional ETFs, and the gold ETF has retained its No. 1 standing. That's not surprising, given gold's strong advance during the third quarter. Since then, gold has continued setting new records, topping $1,400 per ounce on two separate occasions before falling back somewhat.

In addition, high prices for gold and other precious metals have supported mining stocks, and hedge funds are therefore hanging in with their bet on gold miners via the Market Vectors Gold Miners ETF (NYSE: GDX  ) . As they have the potential for even greater returns than the physical metal itself, gold mining stocks are especially useful for hedge funds looking to make bold bets on a continuing run-up in the sector.

With sovereign debt concerns throughout Europe, tax cuts in the U.S. adding further stress to the nation's fiscal survival, and continuing low short-term interest rates, gold investors couldn't ask for a more supportive environment for the yellow metal. Until those factors change, I'd expect hedge funds to stay bullish on gold.

Theme 2: The U.S. is back
Where things are changing somewhat is in the ongoing battle between U.S. and international stocks. Last time we looked, emerging markets made a strong showing in the rankings, with both iShares Emerging Markets (NYSE: EEM  ) and iShares FTSE Xinhua China (NYSE: FXI  ) among the top ETFs. Developed foreign markets were also popular places for hedge funds to park money, as the iShares MSCI EAFE ETF (NYSE: EFA  ) reached No. 5.

Yet while emerging markets still make a respectable showing among hedge fund investors, the SPDR Trust (NYSE: SPY  ) vaulted past the iShares emerging market ETF to move into the No. 2 spot. And perhaps more importantly, small-cap U.S. stocks also now appear in the top 6, with iShares Russell 2000 ETF (NYSE: IWM  ) passing up ETFs covering Brazil and other emerging markets.

Because of the big rise in emerging-market stocks over the years, valuations have now come more into line with multiples on U.S. stocks. Some believe that U.S. stocks are therefore due to outperform in the future, and it appears that some institutional investors are using that approach in building an investment strategy.

What's next
The main problem in trying to track hedge fund movements is that you have to deal with a time delay in finding out about them. So to some extent, by the time you find out about what hedge funds are doing, they may well have gone on to try to capture the next investing trend.

But at least this quarter's data suggest that institutional investors aren't in a huge hurry to modify their core investing strategies quickly. That gives you enough time to make your own decisions about whether to follow the pros or go your own way.

Want to find the best ETFs? Tune in to The Motley Fool's new special free report, "3 ETFs Set to Soar During the Recovery."

Fool contributor Dan Caplinger listens to the pros -- sometimes. He owns shares of the iShares MSCI EAFE, Emerging Markets, and Russell 2000 ETFs. Motley Fool Alpha has opened a short position on iShares Russell 2000 Index. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is fine with you going pro.

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