At least in Hollywood's eyes, getting the inside scoop on an attractive investment before anybody else most often leads some lucky investor to riches. But is there any way to benefit from inside information without landing yourself in some deluxe federal accommodations right next to disgraced financier Bernie Madoff?
Fortunately, there are ways to benefit from the knowledge of corporate insiders without earning a prison sentence. Every day, corporate executives, board members, and others with intimate knowledge of the companies we invest in disclose transactions they make with regard to their respective stocks. And if you want to take advantage of that knowledge without having to dig through a bunch of SEC filings, then you may want to check out an ETF that will do your work for you.
Does this ETF know it all?
The Claymore Sabrient Insider ETF (NFO) follows a somewhat unusual strategy. Like most ETFs, its mission is to track an index of stocks. What makes the ETF special, though, is the particular index it tracks. Although its exact selection process is proprietary, the Sabrient Insider Sentiment Index chooses 100 stocks that have healthy signs of insider buying as well as a history of rising analyst earnings estimates.
After a rocky start, the stock market has generally done fairly well so far this year. But the Claymore ETF has succeeded in choosing index components that have put in some truly extraordinary performance. Just take a look at this short list:
| Stock | Weighting in ETF | 2009 YTD Return |
|---|---|---|
| Clearwater Paper | 1.65% | 457.1% |
| Whole Foods Market (Nasdaq: WFMI) | 1.17% | 194.5% |
| Starbucks (Nasdaq: SBUX) | 1.14% | 103% |
| Cabela's (NYSE: CAB) | 1.10% | 175.1% |
| Southern Copper (NYSE: PCU) | 1.05% | 69.3% |
| Netflix (Nasdaq: NFLX) | 1.05% | 53.2% |
Sources: Claymore, Yahoo! Finance.
Of course, the fund hasn't been so lucky with all of its picks. Other stocks, such as McDonald's (NYSE: MCD) and Myriad Genetics (Nasdaq: MYGN), are down for the year despite the overall market's greater than 10% rise. On the whole, though, the fund's performance in 2009 looks extremely impressive, clocking in with a 33% return so far this year.
Anything but a sure thing
If that's as far as you got with your due diligence, you might conclude that the fund was destined to be a winner. After all, many corporate insiders have a much greater understanding of the companies they work for than the general investing public, so you'd expect the companies that have the most insider support to perform the best.
But even though the Claymore ETF has only been around for a few years, its history shows how mistaken that conclusion is. In 2008, the fund managed to lose nearly 38%, beating its category peers but falling short of the S&P 500's return for the year. Although one could blame the fund's proprietary model for the shortfall, it's more likely that insiders simply didn't fare much better than general investors during the unprecedented financial crisis last year.
Moreover, the fund hasn't owned all of those stocks since the beginning of the year. As of the fund's Feb. 28 semiannual report, only Netflix was on its holdings list. With annual turnover of 84%, this fund does a lot of trading -- so you can't rely on a stock that's there today still being there tomorrow.
Trouble ahead?
Perhaps of greater concern than the fund's performance track record is its failure to attract substantial amounts of assets. The ETF has just $55 million under management, which doesn't put it among the smallest ETFs, but does make it difficult for the fund to operate economically. With expenses capped at 0.60% annually, that means the ETF utilizes just $330,000 for its operations. And although Claymore offers many different ETFs that can presumably pool their resources to cover administrative overhead and other common costs, the typical business model for most ETFs is either to grow or to die.
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