2023-07-18 07:54:57 ET
Summary
- The Goldman Sachs Hedge Industry VIP ETF tracks the top holdings of hedge funds, offering investors a method to follow high conviction ideas of U.S. hedge funds.
- The GVIP ETF has historically underperformed the markets, but can be used to supplement core equity holdings during early parts of equity bull markets.
- Despite its potential short-term benefits, I advise against buying the GVIP ETF at this time due to elevated valuations on some stocks, such as Nvidia.
Recently, I wrote a cautious article on the Global X GURU Index ETF ( GURU ). The GURU ETF has historically lagged the markets because its methodology is based on lagging 13F holdings data and it narrowly looks at the largest holding of hedge funds.
The Goldman Sachs Hedge Industry VIP ETF ( GVIP ) is a similar fund that analyzes lagging 13F holdings data to compile an investment index of hedge fund 'Very Important Positions'.
The key difference between the GURU ETF and the GVIP ETF is that GVIP looks at hedge fund's top 10 holdings instead of just the largest holding. Since a fund's largest holding may not be its best performing at any given time, I believe GVIP's methodology is superior to GURU's.
Overall, I can see the GVIP ETF being used to supplement core equity holdings during the early parts of equity bull markets, as discretionary hedge fund buying can cause VIP stocks to outperform. However, over the long-run, the GVIP ETF suffers from many of the same issues as the GURU ETF. Given elevated valuations on some VIP stocks currently, I would not be a buyer of the GVIP ETF at this time.
Fund Overview
The Goldman Sachs Hedge Industry VIP ETF gives investors convenient access to 'Very Important Positions' of hedge funds, as measured by Goldman Sachs Asset Management. The GVIP ETF offers investors a method to follow high conviction ideas of U.S. hedge funds and gain exposure to dynamic market themes.
The GVIP ETF tracks the GS Hedge Fund VIP Index ("Index"), a rules-based index designed to measure the performance of securities that appear most frequently among the top 10 equity holdings of U.S. hedge funds that invest using fundamental analysis. The index provider curates its information from quarterly 13F filings that hedge funds must file with the Securities and Exchange Commission.
The GVIP ETF has $134 million in assets and charges a 0.45% expense ratio.
Portfolio Holdings
Figure 1 shows the sector allocation of the GVIP ETF. The GVIP ETF's largest sector allocation is currently Information Technology (32.7%), Financials (18.0%), Communication Services (16.9%), Health Care (8.9%), and Energy (7.7%).
The top 10 holdings of the ETF is shown in Figure 2 and comprises 23.6% of the portfolio. The largest holdings in the GVIP ETF is Nvidia Corp. ( NVDA ), which has become the darling of many hedge fund managers.
According to Financial Times , Nvidia made it to the VIP Index in Q3/22, and was only the 12th most popular bet at the beginning of 2023. However, it is now the most popular holding amongst hedge funds, which means hedge funds have been crowding into the name en masse.
This has helped propel Nvidia's stock to an incredible 217.6% gain YTD to July 14th (Figure 3).
However, the worry now is that Nvidia's AI-hype may have gotten ahead of itself, as the company is trading at an eye-watering 43x trailing EV/Sales and 148x trailing P/E (Figure 4). Although analysts are very optimistic on Nvidia's prospects, it is still trading at 26x Fwd EV/Sales.
Return
With the help of some home runs like Nvidia, the GVIP ETF has done well in the past few months, returning 22.8% YTD to June 30, 2023. However, long-term returns have be more modest, at 9.1% and 9.4% respectively on 3 and 5Yr average annual returns.
In the long run, the GVIP has underperformed the markets, as represented by the SPDR S&P 500 ETF Trust ( SPY ), as the SPY ETF has delivered average annual returns of 14.5% and 12.2% on 3 and 5Yr time frames respectively.
When And How To Use GVIP
Thinking about the GVIP ETF's methodology and composition, I believe investors can consider using the GVIP ETF as a supplement to their core equity holdings during the early parts of equity bull markets.
For example, the ratio between the GVIP and the S&P 500 Index tends to show GVIP outperforming when the S&P 500 is in an uptrend (above 150D moving average) (Figure 7).
The reasoning is intuitive and simple; when markets are bullish, the average stock is rising and the 'VIP' stocks within GVIP get an additional boost from discretionary hedge fund buying.
However, there is also the danger of GVIP stocks becoming 'hedge fund hotels' where hedge funds all converge into the same handful of ideas. As we are seeing with Nvidia in real time, the act of hedge funds buying en masse can cause GVIP stocks to trade far above intrinsic values that are justified by their fundamentals. If many VIP stocks become dislocated from their fundamental values, the GVIP ETF may be prone to underperformance as the VIP stocks 'come back to earth' relative to the market.
For example, the GVIP/SPY ratio peaked in early 2021 during the market euphoria phase. Even though the S&P 500 continued to trend higher, the GVIP ETF underperformed as many of the GVIP stocks were bid up to unsustainable levels in the prior run up.
The GVIP/S&P500 underperformance accelerated once the equity markets themselves turned bearish (falling below 150D moving average), as the discretionary buying from hedge funds reversed when hedge funds raced out the door to limit losses.
Since the beginning of the 2023, GVIP has outperformed as equity markets looked past many of the negative macroeconomic headwinds like high inflation and a contracting manufacturing sector.
However, given the elevated valuation multiples on GVIP stocks like Nvidia, I worry we may soon see GVIP underperform similar to what happened in 2021. I would not be a buyer of the GVIP ETF at this time.
GVIP vs. GURU
Overall, I think the GVIP ETF and the GURU ETF share many of the same weaknesses. As I mentioned previously in my prior article on the GURU ETF, 13F filings are delayed by up to 45 days. Between the end of the quarter and the filing date of the 13Fs, a lot could have changed in the macro environment and in hedge fund holdings.
Also, hedge funds may be focused on risk-adjusted returns that compress volatility instead of targeting high absolute returns. By only tracking the long-holdings of hedge funds, the GVIP ETF may be missing 'half the picture'.
However, one improvement I do see with the GVIP ETF compared to the GURU ETF is that it considers the top 10 holdings of hedge funds, instead of narrowly focusing on the top holding only. This has allowed the GVIP ETF to generally outperform the GURU ETF since inception (Figure 8).
Conclusion
The GVIP ETF gives investors a convenient way to follow the high conviction ideas and themes of U.S. hedge funds. Over the long-run, the GVIP ETF has underperformed the markets, with 3 and 5 Yr average annual returns that lag the passive SPY ETF.
However, during the early parts of equity bull markets, I can see how the holdings within the GVIP ETF can outperform as discretionary hedge fund buying adds to buying pressure. The challenge is hedge fund buying may cause stocks to deviate from their fundamental valuations, leaving them vulnerable to steep pullbacks. Furthermore, when stocks enter a bear market, hedge funds are often the first to sell due to their myopic focus on short-term returns.
Overall, I believe the GVIP ETF is only suitable as a short-term supplement for investors during the early innings of equity bull markets. Given extremely elevated valuation multiples on some GVIP stocks like Nvidia, I would be hesitant to buy the GVIP ETF at this time.
For further details see:
GVIP: Maybe Useful To Add VIPs During Bull Markets