Hedge Funds Fall Short: Underperforming Low-Cost S&P 500 ETF By 6% In 2023. Here's Why.

So far, 2023 has not started well for the hedge fund sector, as a common SPDR S&P 500 Trust ETF SPY fared much better than the Global X Guru Index ETF GURU, a fund that invests in the highest conviction ideas from a chosen pool of hedge funds. 

As of this writing, GURU has underperformed the SPY ETF by 6% year-to-date, not exactly the type of result an investor would have expected from a fund costing eight times more than the largest ETF based on the S&P 500.

GURU shows a 0.75% expense ratio compared to only 0.09% of the SPY. 

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Year-to-date performance of SPY ETF and GURU ETF as of April 20, 2023 – Chart: TradingView

Why The Average Hedge Fund Underperformed The S&P 500 This Year

GURU's huge underweight on mega-cap firms appears to have been the key factor behind the underperformance versus the S&P 500. 

Apple, Inc. AAPL, Amazon, Inc. AMZN, and Microsoft Corp. MSFT  are the three largest holdings in the SPY ETF with a 7%, 6%, and 3% weight, respectively, only have a 1.6% weight in the GURU's portfolio. The most representative stock in the GURU ETF is Seagen, Inc. SGEN with a 2.5% weight. 

JD.com, Inc. JD, Rivian Automotive, Inc. RIVN, and Ascendis Pharma A/S ASND were the worst performers in the GURU portfolio, each losing a third of their value. 

Moreover, the gap between SPY and GURU widened after mid-March, when the regional banking crisis started. It seems like hedge funds have broadly missed the latest rally of the broader U.S. stock market. 

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