Guru 2015 Year in Review

Guru 2015 image 1 (All data is year to date through 11/30/2015)

The Global X Guru^™ Index ETF (GURU) seeks to provide alternative alpha¹ over US equity benchmarks by accessing the highest conviction ideas of some of the world’s largest and most sophisticated hedge funds. In 2015, Guru has underperformed the S&P 500, returning -8.06%, while the S&P 500 is up 3.01%. In the analysis below, we provide an outlook for 2016 and explore the key factors that have contributed to the fund’s underperformance this year.

Guru recently rebalanced and its index (the Solactive Guru Index²) will reconstitute the list of hedge funds it tracks in January 2016
Many hedge funds have struggled in 2015, which has negatively impacted Guru’s returns
Picks within the pharmaceuticals industry have contributed to over 1/3 of Guru’s underperformance versus the S&P 500

2016 Outlook

Guru rebalanced on November 26, which removed five companies and added five new hedge fund picks. Each of the five companies removed from the fund had generated negative returns over their tenure as a holding, providing for an opportunity to ‘refresh’ the fund with new selections. In addition, the fund removed two pharmaceuticals companies, Depomed and Shire, lowering the strategy’s overall weighting to the industry.

In January, the Solactive Guru Index will reconstitute its list of eligible hedge funds from which to source high conviction investments. The reconstitution will remove any hedge funds that have increased year over year turnover beyond the 50% threshold as well as those that have seen their assets under management fall below $500m. New hedge funds that meet the various eligibility requirements will be added to the pool as well, potentially providing new investment ideas for the fund.

Guru 2015 image 2

Guru’s ability to generate alpha is dependent on hedge funds successfully navigating the equity markets and identifying investment opportunities. A good proxy for understanding how hedge funds are performing overall is the HFRX Equity Hedge Index, which broadly measures the performance of hedge funds involved in equity strategies. Since Guru’s inception in June 2012, the fund has delivered magnified returns of the HFRX Equity Hedge Index, because Guru is a long-only strategy, while the index represents equity hedge funds which may hold long or short positions. In years such as 2012 and 2013 where hedge funds performed well, Guru performed even better. In a flat year like 2014, Guru was largely flat, and in a down year for many hedge funds like 2015, Guru has followed their negative returns. We believe that over the long term hedge funds will continue to provide market-beating returns due to superior talent and research. When this alpha returns to the hedge fund space, we expect Guru’s returns to follow.

Pharmaceuticals Sector has Weighed on Returns

Looking under the hood, much of Guru’s 2015 underperformance can be attributed to poor stock selections within the pharmaceuticals industry. This year, Guru has had a slight underweighting to the pharma industry, with an average exposure of 8.8% versus 9.8% for the S&P 500. The total return of Guru’s holdings in the pharma industry, however, returned -26.0% while the S&P 500’s pharma companies returned 4.1%. Guru has held hedge fund targets such as Valeant (-47.0%) and Horizon Pharma (-32.6%), which depend on maintaining high growth through acquisitions. These companies have suffered since late July as investigations into the pharmaceutical industry’s pricing practices came under political scrutiny. Overall, Guru’s pharma holdings contributed to over one-third of the fund’s underperformance versus the S&P in 2015.

Guru has found success in the Financials sector and within the Consumer Durables & Apparel industry. Guru has overweighted Financials in 2015 by 4% versus the S&P 500 and generated nearly 5% higher returns in the sector. Its holdings in Nike Inc (38.7%) and DR Horton Inc (19.9%) have delivered strong performance in 2015, leading to 27% higher returns within the Consumer Durables and Apparel industry versus the S&P 500’s holdings in the industry.

Guru Standard Performance

Guru 2015 image 3

*Inception Date: 6/4/2012.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month end, please call 1-888-GXFUND-1 or visit our website at www.globalxetfs.com. The Total Annual Fund Operating Expense is 0.75%.

For Fund performance, please click on the fund ticker: GURU

Footnotes

1. Alpha: excess return relative to a benchmark index

2. The Solactive Guru Index is comprised of the top U.S. listed equity positions reported on Form 13F by a select group of entities that Solactive AG characterizes as hedge funds.

3. HFRX Equity Hedge Index is a non-investible index that tracks the performance of hedge funds involved in equity hedge strategies. Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. Equity Hedge managers would typically maintain at least 50%, and may in some cases be substantially entirely invested in equities, both long and short. Indexes are unmanaged and it is not possible to directly invest in an index.

4. From inception date (6/4/2012) to 12/31/2012. The expense ratio is 0.75%.

Guru 2015 Year in Review

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