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How to Copy Hedge Funds (and Collect Some Big Dividends)

By Selena Maranjian - Apr 10, 2013 at 8:42PM

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This new ETF can save you a lot of money.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some stocks that are popular with hedge-fund managers to your portfolio, the Global X Top Guru Holdings Index ETF (NYSEMKT: GURU) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Global X ETF's expense ratio -- its annual fee -- is 0.75 %. It's also very tiny, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is way too new to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver. The ETF aims to hold the stocks owned by a select group of hedge funds with an equity focus and relatively long holding periods, and it focuses on those funds' strongest-conviction holdings.

Why Gurus?
If you're interested in hedge fund investing, know that it's not for most of us. You typically have to be a rather wealthy sort, and if you're able to invest in such funds, they typically take 2% of your total asset value every year, plus 20% of your annual profits. This ETF, though, simply takes less than 1% of your investment each year.

More than a handful of Guru-approved companies had strong performances over the past year. Hartford Financial Services Group (HIG -0.96%) and Motorola Solutions (MSI 0.01%) each surged 31%. Hartford has been shifting its focus from annuities, retirement planning, and life insurance toward property and casualty insurance. It has been tackling its significant debt, and its fourth-quarter earnings exceeded expectations. The stock has exhibited volatility, but some see it as undervalued now, with a forward P/E ratio of just 8.

Motorola Solutions delivers communication infrastructure, devices, software, and services to governments and businesses globally. One offering, for example, is public safety radio systems. It recently hit a 52-week high and its fourth-quarter report featured double-digit earnings gains and revenue up 6% as well. Some worry about R&D cutbacks, while others like that it's borrowing money to buy back shares. (That's not always smart, if shares are not undervalued, though. And Motorola Solutions has recently been trading at a forward P/E of 14.6%.)

Mortgage REIT Annaly Capital Management (NLY 0.80%) gained 15%, and has many investors drooling over its 11.3% dividend yield. But it has also lost some fans, due to worries about rising interest rates hurting the company or its adding more risk by expanding beyond agency-backed securities. Some even worry about nepotism in the company and outsized compensation.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Allscripts Healthcare Solutions (MDRX -0.24%), which delivers electronic health records (EHR) products and services, slid 20%. The company has been lagging its peers, it was a poor performer in 2012, and its latest earnings report wasn't too impressive. On the plus side, some of its insiders have been buying shares.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Stocks Mentioned

Annaly Capital Management, Inc. Stock Quote
Annaly Capital Management, Inc.
$6.32 (0.80%) $0.05
Allscripts Healthcare Solutions, Inc. Stock Quote
Allscripts Healthcare Solutions, Inc.
$16.73 (-0.24%) $0.04
The Hartford Financial Services Group, Inc. Stock Quote
The Hartford Financial Services Group, Inc.
$66.79 (-0.96%) $0.65
Motorola Solutions, Inc. Stock Quote
Motorola Solutions, Inc.
$210.28 (0.01%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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