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Using Insider ETFs to Beat the Market


Home investors can use these funds to learn where the smart money is accumulating, without having to look up insider filings for every company.

Most retail investors are at a disadvantage in that they're not as plugged into the market as their institutional counterparts. I was mulling over this point and realized that an interesting group of ETFs could pull back the curtain, as it were. Rather than using them as investments, we "home gamers" can use them to gauge how industry insiders feel about the direction of the markets and specific stocks.

Specifically, I'm referring to Insider Sentiment ETFs, which I just became aware of, including:
  • Guggenheim Insider Sentiment ETF (NFO)
  • Direxion Large-Cap Insider Sentiment Shares ETF (INSD)
  • Direxion All Cap Insider Sentiment Shares (KNOW)
Since their inception all three funds have outperformed the S&P, lending credence to my premise:

My Premise: I believe home investors can use these funds to learn where the smart money is accumulating, without having to look up insider filings for company after company. How? The fund managers do the work for you.

Specifically, NFO tracks Sabrient's Insider Sentiment Index and regularly adjusts its portfolio of 100 stocks to "reflect favorable corporate insider buying trends and recent earnings estimate increases by Wall Street analysts that follow the stocks, giving them the potential to outperform."

If executives, directors, and large shareholders are accumulating additional shares in a business, it's a strong statement about the future of that particular company.

As famed Wall Street sage, Peter Lynch, stated: "Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise."

My suggestion on how to get started with this is to begin tracking some of the specific stocks being acquired in these funds and see how they perform versus the market over the next month or so. If they tend to outperform and you like the industry and company's fundamentals, consider using these ETFs as an additional arrow in your stock analysis quiver.

Don't stop investing just because insiders insinuate that we, the investing proletariat, aren't capable of beating the market.

This article was originally published on See It Market.

Twitter: @joagraha
No positions in stocks mentioned.
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